MSCI includes Chinese A-shares in landmark decision for Chinese stock market

MSCI plans to add 222 China A large cap stocks, which represent approximately 0.73% of the MSCI Emerging Markets Index, at a 5% inclusion factor. The implementation will be done in two steps. The first step will be taken in the May 2018 semi-annual index review (at a 2.5% inclusion factor, effective on 1 June 2018) and the second step in the August 2018 quarterly index review (5% inclusion factor, effective on 3 September 2018). Should the daily limit on the Stock Connect be abolished or significantly expanded, MSCI may move to a single-stage inclusion.

Although the immediate effect will be limited in terms of potential inflows (USD 10 to 15 billion in passive inflows are expected in total versus a daily turnover of Chinese A-shares of USD 50 to 60 billion), the long-term impact could be profound. We expect the inclusion to help strengthen the renminbi and improve its status as an international currency. It will also improve the A-share market’s investor structure. With increasing foreign investor participation, the Chinese A-share market will gradually converge with international markets. We expect the inclusion to stimulate the reform and liberalization of China’s capital market and improve market regulation.

Full inclusion will still take five to ten years, depending on the progress of China’s capital market liberalization. If reforms progress faster than currently anticipated, we are likely to see a significant increase in the inclusion factor in three to five years, similarly to the case of the South Korean market. MSCI expects to implement a higher representation of Chinese A- shares in the Emerging Markets Index when the market’s accessibility further improves, daily trading limits are relaxed and the number of stock suspensions declines further.