Index provider MSCI Inc. will expand the weighting of Chinese stocks in its key emerging-markets index by more than four-fold starting in May after “overwhelming support” from investors, a move that is expected to draw billions of dollars of foreign money into its markets.
MSCI will increase the inclusion factor of China A-shares from 5% to 20% in three stages between May and November, raising their weighting in the MSCI Emerging Markets Index to 3.3% from 0.72% currently, the index provider says in a statement on February 28.
There will be 253 large and 168 mid-cap China shares in the index, including 27 ChiNext stocks – the Chinese equivalent of the technology-heavy Nasdaq market – when the process is completed.
A-shares are stocks of Chinese companies listed on the Shanghai or Shenzhen exchanges.
“This decision follows an extensive global consultation with a large number of international institutional investors, including asset owners, asset managers, broker/dealers and other market participants worldwide,” MSCI says. “The proposal to increase the weight of China A-shares garnered overwhelming support from investors.”
The index provider also attributes the upcoming changes to the progress Chinese authorities have made to improve foreign access to the A-shares market, and their plans to actively promote further opening and development of the market.
MSCI began to include large-cap A shares to its emerging-markets benchmark in May 2018.
“Conservatively, we forecast 400 billion RMB (US$59.72 billion) of foreign inflows into the A-shares market this year due to the further inclusion,” Patrick Wong, head of China sales and business development at HSBC Securities Services, says in a statement on March 1.
"MSCI's plan to increase the weighting of China A-shares in its emerging-markets index is a logical step towards increasing the foreign participation in the world's second largest equity market,” he adds.
According to Francois Perrin, a portfolio manager at emerging-markets specialist East Capital, MSCI's move shows that China’s decade-long journey to open up its markets to global investors “bear their fruits today”.
He notes that once the inclusion is fully implemented – a process which he expects will take until May 2020 – the number of Chinese stocks in the index will be almost twice the current figure.
“In that process, the largest ChiNext names will join the index and offer an opportunity to get exposure to the most dynamic and innovative side of the Chinese economy,” Mr. Perrin says in a statement on March 1.
China’s stock markets were the top performers in Asia in the first two months of 2019. China’s benchmark CSI 300 stock index was up 22.23% as at February 28, the Shenzhen stock index gained 21.95%, and the Shanghai stock index rose 17.9%.