New York/Hong Kong (Reuters) – U.S. index provider MSCI will likely open up its Emerging Markets Index next week to the so-called A-shares that comprise the majority of China's stock market after previously rejecting them on three occasions, investors and analysts said.
The company has been in discussions with Chinese regulators and global investors for nearly four years over whether to add yuan-denominated shares listed in Shanghai and Shenzhen to the benchmark—tracked by around $1.6 trillion in assets—but has so far left them out because of concerns over restricted access to China’s equity markets.
China has yet to fix all the problems that make it tough for managers to get money in and out of the country’s stocks, but investors said the likelihood of inclusion dramatically increased after MSCI this year relaxed its criteria.
‘Appears A Formality’
"We detect a marked change in MSCI's accommodation this year," Nick Yeo, head of Chinese and Hong Kong equities at Aberdeen Asset Management, said in an email. “The index creator has modified its own admission criteria to such a degree that China’s entry now appears a formality."
In March, MSCI proposed reducing the weighting of Chinese shares for potential inclusion, cutting the number of stocks to 169 from 448 in a bid to address curbs on repatriating capital from China and concerns over the country’s high number of suspended stocks.
The revised proposal helps address these issues because the 169 stocks can be easily accessed by foreigners through a trading link between the Hong Kong and Chinese exchanges launched in 2014 and significantly expanded in December.
Diversified Group Of Large-Caps
If included, A-shares will initially make up just 0.5% of the MSCI Emerging Markets Index, but they will be diversified with a focus on high-quality large-cap stocks that have a low track record of trading halts. The plan would also cut the weighting of financials and increase that of sectors like consumer discretionary, consumer staples and real estate.
"This does provide a better balance of stocks at the sector level," said David MacKenzie, head of Asian equity management at Schroders. "The move toward a larger-cap focus does hopefully take care of the issues with share suspensions.”