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China’s MSCI inclusion: Big step, little change

Index provider MSCI has today formally included around 230 China A-shares into its three widely-tracked indices, but fund managers see a minimal impact on the A-share market.

A list of 226 large-cap Chinese onshore equities has been included in the MSCI Emerging Markets Index, the MSCI All Country World Index (ACWI) and the MSCI Asia ex-Japan Index.

The index provider announced in mid-May that a total of 234 stocks will be included in the index. However, some companies were excluded because they are currently under stock trading suspension imposed by the mainland regulator, the index provider said in a webcast last night.

The inclusion of China A-shares in the indices has been a much discussed topic in the investment community, with a number of fund managers launching China A-share focused mutual funds this year. However, fund managers have said there will be minimal impact on the A-shares market despite the recent development.

Frank Tsui, portfolio manager at Value Partners, believes that the near-term changes would be limited.

Frank Tsui, Value Partners

“The aggregate flow brought by passive funds to the market is expected to fall in the range of $20-25bn. Compared to $70-80bn daily turnover of A-shares market, the impact is considered minimal,” he said.

In addition, active managers that have identified opportunities in China A-shares have already set their allocations to the share class. “The [MSCI] announcement happened a year ago, which leaves more than enough time for them to increase their exposure.”

Tsui, who manages the Value Partners Classic Fund, said he did not increase A-share allocation in the run-up to inclusion. He added that A-share exposure in the fund has been lowered to 6% from 10% in April due to the cautious investment sentiment following the recent onshore credit defaults.

Like Tsui, Felix Lam, senior portfolio manager for Asia Pacific equities at BNP Paribas Asset Management, said that the beginning of the inclusion will not have a huge impact on the onshore stock market because of the relatively small weighting of China A-shares in the indices at this stage.

It is expected that, after two stages of inclusion (the second to take place in September), China A-shares will account for 0.78% of the MSCI Emerging Markets Index.

“The access to the Chinese equity market has been open for a while. But it shows us a clear roadmap that the index will gradually add a bigger exposure of A-shares.”

Institutional push

Investors in passive funds following the MSCI index will now have to take on the increased A-share exposure, which is expected to result in higher institutional investor participation.

“The mainland market, which is largely dominated by retail investors, remains very momentum-driven,” Lam explained. “Volatility in each stock is therefore higher. However, more institutional investors may bring a rational mentality to the stock trading behaviour and international standards of corporate governance,” he said.

Bin Shi, head of China equities at UBS Asset Management, said in a report that he agreed the inclusion could bring more institutional investors into the A-share market. Their long-term investing strategies and fundamentally-driven approach will change the market structure.

‘The inclusion of A-shares in MSCI indices will help improve corporate governance and many other aspects of the A-share market because Chinese companies will have to bring their standards in line with those expected by international investors,” Shi said.

Frederick Chu, head of ETFs at China Asset Management (AMC), also expects that the inclusion will influence listed companies to improve corporate governance. “A better corporate governance standard in these Chinese enterprises would certainly reduce the duration and the frequency of the mandatory suspension. But it could take a rather long time.”

Frederick Chu, China Asset Management

Chu also believes that the inclusion will somehow affect regulators’ actions, citing the unexpected trading suspension that took place during the stock market crash in 2015.

“The inclusion will propel the regulator to further clarify the conditions that lead to a trading suspension and the expected suspension duration,” said Chu. He added that regulators will have to make sure every suspension decision is made to protect interests of shareholders.

Exchange-traded funds in Singapore that track the three MSCI indices

Source: FE. * The ETF is also available for Hong Kong retail investors.

Part of the Mark Allen Group.