Daily ETF Watch: MSCI To Decide On A-Shares

May 14, 2015

Index provider MSCI next month will announce a decision on the possible addition of China’s mainland A-shares market to its main indexes. The index company currently excludes China’s A-shares market from its headline benchmarks like the MSCI Emerging Markets Index, but includes them in a separate family of China indexes.

 

The A-shares market includes stocks listed on the Shanghai and Shenzhen stock exchanges that foreign investors have limited access to. Foreign investors have generally gained access to China’s markets through the B-shares market, depositary receipts, and shares listed on the Hong Kong Stock Exchange or derivatives.

 

Foreign investors have some limited direct access to the A-shares market via the qualified foreign institutional investor (QFII) programs. The program accounts for about 1 percent of total market value.

 

The A-shares market has clearly generated interest among investors, who want a more complete representation of China’s large equity markets. For  example, the Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (ASHR | D-53) has hauled in assets since its November 2013 launch and even at times hit up against QFII limits, illustrating the limits of access. It now has almost $1.3 billion in assets.

 

Up to this point, MSCI has kept the A-shares market separate from its well-known emerging markets index, which underlies the $33 billion iShares MSCI Emerging Markets ETF (EEM | B-97), mainly because of the restrictions on foreign investors.

 

However, China has been moving to loosen those rules, most notably by expanding its QFII quota program and with the launch of its “Connect” programs. The Shanghai-Hong Kong Stock Connect program allows foreign investors to access certain A-shares listed on the Shanghai Stock Exchange via the Hong Kong Stock Exchange.

 

A similar plan is expected to kick off for the Shenzhen Stock Exchange in the second half of this year. That partial opening of the markets could be enough for MSCI to give the A-shares at least partial representation in its mainstream indexes.

 

The question of including the A-shares is the only decision on the slate for this year’s Annual Market Classification Review.

 

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