23 October 2016
Most market observers believe MSCI will wait for some more time before it includes China's A-shares into a key emerging markets index. Photo: Reuters
Most market observers believe MSCI will wait for some more time before it includes China's A-shares into a key emerging markets index. Photo: Reuters

What happens if A shares don’t make it to MSCI this year?

I was interviewed by CCTV on its stock market investment program recently and we covered seven topics.

First was the potential inclusion of A shares in the MSCI Emerging Markets Index.

Second was whether such a situation will result in incremental allocation of foreign funds to A shares, potentially shoring up the bull market.

Third was the significance of the forthcoming mutual recognition of funds between the mainland and Hong Kong.

Fourth was expectations of Hong Kong investors about a mutual recognition deal and if Hong Kong investors will buy A shares through the scheme.

Fifth was how the Growth Enterprise Market in Hong Kong has outperformed since April and even fared better than Shenzhen’s growth enterprise board. Was it related to the upcoming Shenzhen-Hong Kong Stock Connect?

Sixth was worries that the Shenzhen stock link will trigger a heavy sell-off in Shenzhen’s growth enterprise board.

And finally, whether the mutual recognition arrangement and the Shenzhen stock link will add new channels for mainland investors to access the Hong Kong market, on top of existing qualified investor schemes and Shanghai-Hong Kong Stock Connect. 

I wrote in mid-May that there is a 50-50 chance that A shares will be included in MSCI this year.

However, I believe the chance has dropped to 30 percent after three weeks of sharp fluctuations in Hong Kong and in the mainland.

It’s more likely that MSCI will unveil a transitional index for A shares and review their inclusion in three or six months.

The idea was first mentioned in March 2014. Market participants once thought the expected launch of Shanghai-Hong Kong Stock Connect would enhance the prospects of A shares making it into MSCI.

There have been tremendous changes this year.

The question is no longer whether A shares should be included in MSCI but when.

Also, the Chinese authorities have been eager to expand acceptance of A shares among global investors.

In fact, some global investors have been researching A shares and reviewing their portfolio for a more balanced allocation.

It’s quite certain the A share inclusion will occur next year. A number of bearish global fund managers have switched their stance on A shares.

However, the inclusion may not bring trillions of yuan flooding into the mainland market.

In the week to May 27, the mainland market saw a net inflow of US$4.58 billion, the highest since 2000.

The A-share market is dominated by retail investors and not yet fully accessible to foreign investors.

This article appeared in the Hong Kong Economic Journal on June 8.

Translation by Julie Zhu

[Chinese version中文版]

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Senior investment banker

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