ETFs key to inclusion of China A-shares in MSCI EM Index

Apr 5th, 2016 | By | Category: ETF and Index News

MSCI, a leading provider of indices to the exchange-traded funds industry, has announced that the removal of anti-competitive clauses surrounding financial products such as China-linked ETFs will be important in facilitating the partial adoption of A-shares into the MSCI Emerging Markets Index.

ETFs key to inclusion of China A-shares in MSCI Emerging Markets Index

MSCI have proposed the inclusion of 5% of China A-Shares’ free float adjusted market capitalization in the MSCI Emerging Markets Index.

Current provisions require that ETFs linked to an index containing China A-Shares need to be pre-approved by local Chinese stock exchanges before the fund is launched domestically or internationally. This feature, which has been applied to both new and existing ETFs, is unique among emerging markets and has emerged as a critical concern. MSCI, as part of an ongoing consultation into the suitability of China A-shares, has opened discussions with local Chinese stock exchanges in an effort to resolve this issue.

MSCI may include 5% of China A-Shares’ free float adjusted market capitalization in the MSCI Emerging Markets Index, subject to an evaluation of the accessibility of the China A-Shares market for international institutional investors. MSCI will announce its decision in June 2016.

In making its decision, MSCI will also seek feedback from international institutional investors on several matters. These include the effectiveness of the QFII policy changes in affecting accessibility and capital mobility; the resolution of remaining uncertainties surrounding beneficial ownership issues impacting asset owners who delegate investment and operational decisions to their fund managers; and the successful implementation of measures preventing wide spread voluntary suspensions of trading such as what occurred during large sell-off activity in the second half of 2015 and in early 2016.

A verdict in favour of inclusion may see China A-shares increase in value as several large mutual funds and ETFs tracking the MSCI Emerging Markets Index would be required to buy these stocks to align their portfolios with the updated index constitution. These include a suite of iShares ETFs such as the $25.3bn iShares MSCI Emerging Markets ETF (EEM), the $10.3bn iShares Core MSCI Emerging Markets ETF (IEMG), and the $3.2bn iShares MSCI Emerging Markets Minimum Volatility ETF (EEMV).

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