In this Q&A, Matthews Asia Portfolio Strategist Jeremy Murden offers his views on the further inclusion of China A-shares in index provider MSCI's indices.
WHAT CHANGES HAVE BEEN MADE TO THE MSCI INDICES?
With the rebalance on November 27, 2019, index provider MSCI will complete the planned increase of both the weighting and breadth of China A-shares exposure in its emerging markets index as well as its China index and other regional indices.
In 2019, the inclusion factor rose to 20% from 5% through a three-step implementation process of 5% increments that began in May. In addition to the increase in allocation to the existing securities, MSCI also increased the breadth of the securities by including ChiNext shares as well as mid-cap stocks. Following the rebalance, Chinese A-share securities now make up approximately 4.2% of the MSCI Emerging Markets Index, an increase from 0.72%, and China exposure including A-shares now makes up approximately 33.6%.
WHY WERE THESE CHANGES MADE?
The move follows the successful implementation of the initial 5% inclusion of China A-shares in 2018 and wide support for the weight increase from international institutional investors. MSCI consulted with a large number of international institutional investors, including asset owners, asset managers, broker/dealers and other market participants worldwide as part of its review process.
Additionally, there was significant growth in the adoption of A-share investment by international investors as the number of northbound Stock Connect accounts grew from 1,700 before the June 2017 inclusion announcement to over 7,300 in February 2019. The Stock Connect programs in recent years linked the Shanghai and Shenzhen stock exchanges to the Hong Kong Stock Exchange and enabled foreign investors to buy A-shares with fewer restrictions.
ARE FURTHER INCREASES EXPECTED?
Yes. While no future increases are currently scheduled, MSCI is in regular contact with the China Securities Regulatory Commission (CSRC) regarding the proposed improvements in market accessibility that would lead to an increase in the inclusion factor.