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).
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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.