China’s domestic A shares are expected to join MSCI’s global emerging markets index for the first time this year, with adjustments to the annual benchmark scheduled for announcement by the New York company on June 20.
While observers have long expected A shares in the world’s second-largest stock market to soon join the MSCI global emerging markets index, their inclusion has been scuppered over the past several years by concerns over market access for foreign investors.
While China‘ s B shares are traded in US or Hong Kong dollars and were opened to overseas investment in 2001, China’s A shares are traded in the Chinese yuan and are still subject to considerable controls on foreign investment.
China’s capital control regime also serves as a further deterrent to overseas investors, with a 20% monthly limit on overseas transfers of capital invested under the country’s qualified foreign institutional investor initiative.
Analysts now expect MSCI’s recent decision to half its planned A-shares index weighting to 50 basis points to facilitate the inclusion of Chinese stocks on the index, by reducing their sway to a token amount that would still serve as a symbolic milestone.
While Wong Kok Hoi, chief investment officer of Singapore-based APS Asset Management, acknowledges that the MSCI decision leaves Chinese A-stocks with a “watered down version of its earlier proposal,” he nonetheless contends that “it would still be a watershed event for the Chinese stock market.”
The symbolic event could mark the start of greater foreign investment in China’s A stocks, with Wong anticipating overseas investors to eventually “really start to get serious” about including the securities in their portfolios.
“The short-term impact will be small…today, most foreign investors don’t have a single resource allocated to track China A,” said Wong. “But investors will start preparing for the day China A becomes a significant part of the indices – not just global emerging markets.”