After three straight years of rejection from the prestigious and widely benchmarked MSCI Emerging Market Index, Chinese domestic A-shares may finally make the list in 2017.
Kicking off its annual review, MSCI sent a revised proposal to fund managers that could pave the way for Chinese onshore stocks to be included in the coveted index.
But even if Chinese A-shares do receive the green light from MSCI—a decision is expected in June—their inclusion cannot be considered a triumph for most Chinese issuers. The latest proposal cuts the number of companies from 448 to 169, and only gives Chinese A-shares a 0.5 percent weighting in the index. It’s a symbolic gesture, at best.
Half a Percent
Theoretically, the inclusion of Chinese A-shares in the Emerging Market Index will funnel more foreign money into the $7 trillion Chinese stock market and give onshore markets more credibility amongst global investors.
But MSCI’s latest proposal is extremely watered down for Chinese companies. The new recommendation abandons the previous proposal based on Beijing’s Qualified Foreign Institutional Investor (QFII) framework and will instead use a framework based on Hong Kong’s stock market connection with Shanghai and Shenzhen exchanges. This proposal, through the stock market connection, eliminates some of the restrictions inherent in the QFII framework such as investment quotas and eases others such as capital repatriation.
But the proposal also cuts the list of A-share companies from 448 to 169, which limits inclusion to only the large-cap companies that are already accessible today via the exchange connect. In practice, the proposal likely won’t subject a larger swath of the Chinese market to foreign investor scrutiny—only the biggest companies already exposed to global investors will be included.
Under the new consideration, yuan-denominated A-shares would only make up around 0.5 percent weighting within the Emerging Market Index, half of the previously proposed level. In addition, the offshore yuan will be used for calculations, as opposed to the onshore yuan.
Another stipulation by MSCI is that all companies whose stock has been suspended for more than 50 days would be excluded from the index. Two years ago during China’s stock market crash, more than 1,000 companies suspended trading of their shares.
