iShares implementation guide

Making sense of A shares’ addition to the MSCI

On June 20th, MSCI announced the partial inclusion of China A-shares within the MSCI Emerging Market (EM) Index. While the immediate market impact may be muted, we believe the long term investor implications are likely to be far-reaching.

Highlights

  • On June 20, 2017, MSCI announced its decision to include a set of China A shares (China’s locally listed shares) in its emerging market and global indexes effective summer of 2018.
  • By having a larger weight in secular growth sectors, A-shares provide access to sectors of the economy currently under-represented in other share classes.
  • While the immediate market impact may be muted, the long term investor implications are likely to be far-reaching.

A larger slice of the pie

Historically, foreign investors have had unrestricted access to only about half of China’s over US$8 trillion equities market (via H-share, Red-Chip, P-Chip and foreign listed equities).1 The remaining half is comprised of A-shares, which were only available to foreign institutions under strict quotas set by the Chinese government. Significant progress has been made in adding flexibility to the quota system and capital mobility (for example through the Shanghai-Hong Kong connect program, which allows international investors to access local China A-Shares through less restrictive mechanisms via the HK market). One condition of full MSCI index inclusion is the eventual complete removal of the quota system.

By having a larger weight in secular growth sectors (including materials, industrials, consumer discretionary and healthcare), A-shares provide access to sectors of the economy currently under-represented in other share classes.

Too big to ignore

Many investors believe that China is currently under-represented in global equity indices relative to its economic influence (for example, China represents roughly 17% of global GDP, 11% of global trade, and 9% of global consumption but today comprises only a 3.5% weight in the MSCI ACWI Index).1,2 Given the size of the China A-shares market, inclusion in global indices is regarded as key to bringing China’s overall representation more closely in line.

Initially, only 5% of the market capitalization of the eligible stocks will be included (0.73% of the MSCI EM Index). Over time, full inclusion could bring China’s weight in the index from over 27% today to nearly 45%.2

“Roadmap” for potential 100% inclusion in the MSCI Emerging Markets Index

Roadmap for potential 100% inclusion in the MSCI Emerging Markets Index

Source: BlackRock, MSCI, as of 6/20/17. Notes: Index constituents subject to change. *The percentage number refers to the inclusion Factor applied to the free float-adjustment market capitalization of China A share constituents in the pro forma MSCI China index.