China’s A-shares may not make it to the MSCI emerging markets index this year as Beijing still needs to improve market access for foreign investors, according to a senior executive at State Street Global Advisors (SSGA), a US-based asset management firm.
“We certainly expect [the inclusion] over the next few years. But I think this year is… quite close to call. I think the consideration around accessibility still needs to be answered,” said Kevin Anderson, SSGA’s head of investments for the Asia Pacific region.
“For example, it is important that Shenzhen [Stock Connect] is up and running. That’s the question the index provider will obviously be considering,” he said on Wednesday.
At the moment, international investors are able to access the mainland capital market only through the qualified foreign institutional investor (QFII) and renminbi qualified foreign institutional investor (RQFII) programs and the Shanghai-Hong Kong Stock Connect scheme.
Foreign investors have been seeking greater access to the market and eased capital controls.
The MSCI emerging market index is created by Morgan Stanley Capital International (MSCI) to measure equity market performance in 23 emerging economies.
It reviews its constituents each June to decide if a country can be included in the index based on economic development, market size, liquidity and accessibility.
As a wide variety of financial products worldwide such as exchange-traded funds and mutual funds track the performance of the international benchmark, inclusion of A-shares in the index could lead to more fund flows into the Chinese market.
Sunny Ng, head of portfolio strategy Asia ex-Japan at SSGA, said the MSCI will surely include A-shares in the index at some point in the future, as the Shanghai and Shenzhen stock markets together constitute the second largest market in the world in terms of capitalization and turnover.
“It’s too big to ignore. It’s just a matter of time… they are going to do it when the access [to the market] becomes big enough,” he said.
But he said the MSCI is likely to include A-share constituents to the index on a gradual basis. Hence, the stocks may account for only a small percentage of the index in the beginning.
But the weighting will become heavier when there is improvement in the quota and size of QFII and RQFII, Ng said. Full inclusion may happen after abolishment of the quota system and elimination of capital mobility restrictions, he said.
“A-shares will represent about 20 percent of the MSCI emerging market index if you are just looking at market cap basis… [but] they won’t do that in the first step,” Ng added.
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