MSCI hopes to include Chinese A-shares in its flagship emerging markets index as early as next year, the latest sign of the increasing openness of mainland markets to global investors

March 12, 2014 11:58 am

MSCI eyes listing of China A-shares next year

By Josh Noble in Hong Kong

MSCI hopes to include Chinese A-shares in its flagship emerging markets index as early as next year, the latest sign of the increasing openness of mainland markets to global investors.

The New York-based index provider has launched a consultation on the inclusion of A-shares – which are listed in mainland China and denominated in renminbi – in its flagship emerging markets index from May 2015. Such a move would come much earlier than many analysts had been expecting.

The proposed addition of mainland-listed equities to the index, which is tracked by international funds worth about $1.5tn, follows wide-ranging moves by Chinese authorities to increase overseas participation in its markets.

Although access to onshore equity and bond markets is still restricted by a quota system, mainland regulators have loosened restrictions on what foreigners can buy once granted a licence, and promised to speed up the waiting times for those hoping to invest.

The amount of quota available under current regulations stands at $216bn, roughly 7-8 per cent of the market capitalisation of the Shanghai equity market. However, so far only $82bn of that total has actually been allocated to investors, something MSCI is confident will change.

“We think there have been very significant developments, and the regulators continue to open up the market,” said Chin Ping Chia, MSCI’s head of index research for Asia. “It’s important for us to reflect our assessment.”

The initial step put forward by MSCI would lead to A-shares accounting for just 0.6 per cent of the emerging markets index. By comparison, Indonesia makes up 2.4 per cent of the index, and Thailand 2.6 per cent – both markets far smaller than China.

The MSCI road map includes a scenario where China’s portion of the index rises to as much as 10.2 per cent, although that would require the total abolition of the current investment restrictions and a full liberalisation of the capital account – both still distant prospects.

The proposals would also result in a drastic overhaul of the MSCI China index, which would have its constituents increased from 136 to 385.

Mark Makepeace, FTSE chief executive, told the Financial Times that investors needed to be making concrete plans for how to manage China’s inclusion in index products in the coming years.

Analysts said the move was positive for the Chinese market, but would have limited short-term effects.

“The inclusion points to a positive direction for A-share internationalisation and the promotion of the China capital markets globally,” wrote Ben Bei, China equity strategist at Goldman Sachs in a report. “However, we expect the real tangible impact to A-shares may be muted at the initial stage due to the subdued weight proposed.”

MSCI will now seek the opinions of investors, with a view to making a final decision on the proposals in June.