Value Partners: Limited impact from MSCI delaying A-share inclusion

15-06-2016

Value Partners

MSCI stated today that it could consider the possible inclusion of China A shares in the MSCI Emerging Markets Index as soon as the issues it has outlined are resolved, adding that such a decision may happen outside the regular schedule of its annual Market Classification Review (i.e., in an off-cycle announcement).  Therefore, the inclusion will depend on how China will deal with the issues especially the no. 4 criteria below:

  1. the positive feedback from international institutional investors on the effectiveness of the QFII policy changes affecting accessibility and capital mobility
  2. the resolution of the beneficial ownership issues (for Stock Connect)
  3. the successful implementation of measures preventing wide spread voluntary suspensions of trading and
  4. the full removal of anti-competitive measures imposed by the local Chinese stock exchanges that limit the investment and hedging vehicles available to international investors.

Assuming the above four issues are resolved, the actual implementation timing will be 12 months after the announcement and likely it will begin with the 5% inclusion factor^ (representing ~0.5% of SSE total market cap) that was proposed by MSCI.  In other word, the inclusion may carry significant symbolic value, but it’s unlikely to be a major flow/liquidity and valuation event for the equity market, at least not in the near future.

^ Refers to 5% of the free-float A-share market capitalization. The weighting of A shares in the MSCI Emerging Markets Index will be about 1.1%.

 

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