Global Insights: Countdown to MSCI China A-Share Inclusion

   Download PDF

Executive Summary

  • Whether or not MSCI adds China A-shares to the MSCI Emerging Markets index as part of their next round of updates in June, we believe that implementation of a gradual inclusion process is only a matter of time given China’s central role in the emerging markets.
  • MSCI has previously indicated the need for Chinese regulators to address four issues prior to China A-shares being included in indices: (1) increasing market accessibility and capital mobility; (2) clarifying beneficial ownership issues, (3) eliminating pre-approval requirements for index-linked products and (4) curbing widespread voluntary trading suspensions.
  • In recent years China has taken a number of steps to help smooth the path to inclusion such as expanding foreign access to China A-shares through the Shanghai-Hong Kong Stock Connect program and clarifying uncertainty relating to beneficial ownership.
  • We anticipate that the inclusion of China A-shares in the MSCI index, whenever it occurs, will prompt global investors to increase emerging market equity allocations and shift toward a more holistic “China All Shares” approach to obtaining China exposure that will include China A-shares, H-shares and American depository receipts (ADRs).

In recent years, there has been increasing discussion of the potential inclusion of China A-shares, stocks listed onshore on the mainland Shanghai and Shenzhen stock exchanges, in the MSCI Emerging Market (EM) index1, an index tracked by around US$1.6 trillion2 in assets. At present, China A-shares carry zero weight in the MSCI EM index. In fact, the topic of the ‘inclusion’ has been on MSCI’s annual review agenda for years, for which the results of this year’s review are expected in June.

In our view, MSCI China A-shares will eventually be added to the MSCI EM index, even if not this year. Such a move would be further evidence of China’s ongoing progress in liberalizing its financial system and opening its capital accounts. As this development will impact how global investors manage their portfolios, we believe it pays to be aware of the implications and prepared to act.

Aligning China’s economic representation in global indices

Why is there a need to include China A-shares in the MSCI EM index? As the world’s second largest economy, China’s position in global equity indices is still relatively low (2.4% weight within the MSCI All Country World Index compared to 53.2% for the US)3. What is currently included in global indices represents only a fraction of the entire Chinese investment universe–primarily offshore stocks, such as Hong Kong-listed shares and overseas American Depository Receipts (ADRs).

Click Download PDF to read the full article


1 A-share inclusion would also apply to other global MSCI Indices, such as MSCI Asia ex Japan.The MSCI EM index is part of the MSCI All Country World index (ACWI).

2 Source: MSCI, eVestment, Morningstar and Bloomberg as of June. 30, 2015(latest available data).

3 Source: MSCI, Factset, as of March 31, 2016. China weight refers to Chinese companies listed offshore and does not include China A-shares and Hong Kong companies.