ETFs prep for MSCI’s latest China A shares weight increase

Nov 25th, 2019 | By | Category: Equities

Passive fund managers running China and emerging markets equity ETFs linked to MSCI indices are gearing up for the latest scheduled increase in the portfolio weight of China A shares.

ETFs prep for MSCI's latest China A shares weight increase

Danny Dolan, Managing Director of China Post Global.

To be implemented as of market close on 26 November, index provider MSCI will add a total of 204 new China A shares, including 189 mid-cap stocks, to the MSCI China and MSCI Emerging Markets indices.

At the same time, the index inclusion factor for 268 existing China A share constituents will be increased from 0.15 to 0.20.

On completion, China A shares will command weights of 12.1% and 4.1% in the MSCI China and MSCI Emerging Markets indices, respectively.

As of Q2 2019, there were just shy of 50 ETFs linked to these indices, according to MSCI data.

In the US, the biggest funds to be affected are the $56.8bn iShares Core MSCI Emerging Markets ETF (IEMG US) listed on NYSE Arca and the $4.0bn iShares MSCI China ETF (MCHI US) listed on Nasdaq.

In Europe, the $13.8bn iShares Core MSCI EM IMI UCITS ETF USD (Acc) (EIMI LN) and the $1.1bn Xtrackers MSCI China Index UCITS ETF (DR) (XCS6 LN) are the most significant funds to be impacted by the changes. Both funds maintain multiple listings across major exchanges in Europe.

Investors in these funds can expect to see changes reflected on 27 November.

Significant step

Danny Dolan, Managing Director of China Post Global, said the increase was “another significant step forward” for China’s onshore equity market, and that this year’s quadrupling of the China A share weights in the MSCI indices was expected to result in “over $80 billion of inflows into China’s A share market in 2019.”

China Post Global is an ETF issuer and subsidiary of China Post Fund, a domestic Chinese asset manager with over $18bn in assets under management.

Dolan said the weight increases were very positive for the Chinese market: “Firstly, this year’s index-related inflows of close to $90bn help offset the impact of the US-China trade war, and have helped the CSI 300 index rise by 28% year to date.

“Secondly, many of these new assets are from institutional investors globally, with longer-term investment horizons than average for the Chinese market, which has historically been retail-driven. This should help stabilise the market and reduce volatility.”

This view is supported by the findings of a recent survey by the Economist Intelligence Unit, commissioned by asset manager and ETF issuer Invesco, which found that over 80% of institutional asset owners and professional investors were planning to increase either significantly or moderately their allocation to Chinese investments over the next 12 months. Only 4% planned to reduce exposure to China.

Jason Wincuinas, Senior Editor at the Economist Intelligence Unit, said the bullish stance on China uncovered in the survey was “illuminating”, adding that the survey was conducted “before some of the most recent announcements about easing restrictions on foreign investors”.

On this theme, China Post Global’s Dolan says that while there will be further increases to the China A shares weights of all relevant major global indices in the years ahead, additional compromise by the Chinese authorities on foreign ownership is required.

“The current 30% cumulative limit on foreign ownership of China-listed companies is already causing challenges, with some companies already having their index weights reduced to ensure tradability”, said Dolan.

STAR Market

Alongside the A shares weight increase, equities traded on the recently launched Sci-Tech Innovation Board (STAR Market) of the Shanghai Stock Exchange are also set to be added to relevant MSCI indices.

STAR-traded stocks are expected to enter the MSCI China, MSCI China All Shares and MSCI China A Onshore indices, provided they meet the necessary eligibility requirements as per the MSCI GIMI methodology, including Stock Connect eligibility.

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