MSCI will include China’s A shares in its Emerging Markets Index starting in June 2018, signaling a large-scale repositioning of some $1.6 trillion in funds tracking the MSCI EM index.
“This decision has broad support from international institutional investors with whom MSCI consulted, primarily as a result of the positive impact on the accessibility of the China A market of both the Stock Connect program and the loosening by the local Chinese stock exchanges of pre-approval requirements that can restrict the creation of index-linked investment vehicles globally,” MSCI said in a statement.
The move, which was widely anticipated, could trigger an inflow of as much as $210 billion into China’s equities over the next five years, according to Goldman Sachs.
“This is a significant and highly symbolic recognition of China’s importance to the global economy, and a big vote of confidence in the Chinese growth story from MSCI and its clients,” said Danny Dolan, managing director of China Post Global, in emailed comments.
Even so, the immediate impact on the Chinese stock market from portfolio rebalancing following MSCI’s announcement is likely to be muted, according to Capital Economics.
“What’s more, a steady increase in the inclusion of A-shares in the MSCI Emerging Markets Index will probably only happen if China continues to liberalize her financial markets, including granting greater access to foreign investors and addressing fears over capital controls,” said John Higgins, an economist at Capital Economics, in a note.
The Shanghai Composite Index
is up 1.2% this year, lagging behind the S&P 500’s
8.9% rally. The Chinese yuan
remained steady on the news, trading at 6.83 to the U.S. dollar.
MSCI selected 222 A shares, accounting for roughly 0.7% of the MSCI EM index. That is more than the 169 stocks it had initially proposed. In line with its decision, the index provider will also launch the MSCI China A International Large Cap Provisional Index on Wednesday.