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What MSCI adding China A-Shares means for investors

This article is part of
Guide to investing in China

What MSCI adding China A-Shares means for investors

Earlier this year, index provider MSCI sent ripples of excitement through investment markets when it announced it would be adding 222 A-shares stocks to its emerging market index.

From 2018, the inclusion of the mainland China companies in the emerging market index means retail and institutional investors across the world will be given greater access to companies whose shares have traditionally been available to domestic, but not to international, investors.

The move, which constitutes just 0.73 per cent of the MSCI Emerging Markets index, is also expected to bring a further $17bn (£13.2bn) to $18bn (£13.9bn) of investment money flowing into China’s domestic stock market.

Positive step?

Gary Monaghan, an investment director based in Hong Kong for Fidelity International, says: “A-share inclusion in MSCI indices is a positive step for China’s equity markets and its overall capital markets.

“This also benefits investors as they now have broader access to companies, and more ideas means more potential investment opportunities.

"The inclusion of A-shares is limited, as expected, but there is certainly a case for greater inclusion over time, which will only strengthen investor focus on China.”

Top five companies added by market cap (as at 22 June 2017):

  • ICBC $255.9bn (£198.8bn).
  • China Construction Bank $207.7bn (£160.8bn).
  • Petrochina $195.2bn (£151.6bn).
  • Agricultural Bank of China $162.3bn (£125.8bn).
  • Bank of China $152.8bn (£118.1bn).

According to Josh Crabb, head of Asian equities for Old Mutual Global Investors, the inclusion of the domestic A shares in the index is “an historic milestone along China’s path to open up its domestic financial markets and attract foreign capital inflows”, the importance of which should not be underestimated.

He explains: “The anomaly that exists between China’s economic strength and stock market capitalisation, relative to its index weight, is finally starting to correct.”

Another manager who has welcomed the move is Howard Wang, manager of the £184m JPMorgan Chinese Investment Trust, whose portfolio already has a 16.9 per cent exposure to the China A-share market.

He comments: “This is an acknowledgment of the tremendous effort China made in the past few years and it is a key milestone in the overall capital market liberalisation process.

“We expect this to provide a much-needed catalyst for the lagging China A-share market year-to-date.”

The liberalisation process has been going on for a while. There was the Shanghai-Hong Kong programme in 2014 and the launch of the Shenzhen-Hong Kong programme in 2016, which according to Victoria Mio, chief investment officer for China at Robeco, has "greatly improved the capital accessibility of the foreign capital".

She explains: "These allowed investors to trade shares easily on the other markets using their local brokers and clearing houses.

"The trend of China's opening up of its capital market is set to continue, as China is also planning to launch a bond market connect between Hong Kong and the mainland exchanges."

Unwarranted

But not everyone believes this marks a significant sea-change in Chinese open-door policy. Nimalan Govender, portfolio manager, Asia Pacific, for Morningstar, comments: "There was always a question of whether the hype surrounding the A-shares addition was warranted.