China A-shares finally take their place on the world stage

As we expected, MSCI has now formally decided to include China A-shares in its benchmark indices following its latest Market Classification Review, marking an important milestone for China’s international markets.

In a slight change from the initial proposal, which covered the inclusion of 169 eligible stocks, MSCI now plans to include 222 China A-share large-cap stocks at a 5% partial inclusion factor, giving A-shares a weighting of around 0.73% in the MSCI Emerging Markets Index. This increase was due to MSCI’s adoption of the recommendation to include large-cap A-shares with H-share equivalents in the MSCI China Index. Incorporation of the new stocks will take place in two phases: the first in May 2018 and the second in August 2018.

The small weighting could be seen as a symbolic gesture, but the prospects for the further development of China’s equity market are looking positive. Chinese market sentiment will see a boost at a time when investors are worried about increased regulation and the possibility that China’s economic activity may have already peaked. Initial analyst estimates for passive inflows into the A-share market stand at around USD 1.5 billion—relatively small compared to the A-share market cap of USD 7 trillion. The change to the benchmark will not immediately spark large inflows, but the greater attention focused on China’s market should help to further improve market accessibility and loosen trading restrictions in the future.