HSBC comments on MSCI China A-share inclusion

Jun 16th, 2017 | By | Category: ETF and Index News

ETF STRATEGY NEWS! ETF Strategy is delighted to announce the launch of ETF Strategy Hub (hub.etfstrategy.com), an on-demand repository of webcasts, videos, podcasts and white papers. Debuting with Special Series on Technology & Innovation in China and the Digital Economy.


By Stephen Kam, senior product specialist, Asian equities at HSBC Global Asset Management. HSBC GAM offers the HSBC MSCI Emerging Markets UCITS ETF which has a total expense ratio of 0.40%.

Stephen Kam, Senior Product Specialist, Asian Equities at HSBC Global Asset Management

Stephen Kam, Senior Product Specialist, Asian Equities at HSBC Global Asset Management.

With A share investors jittery about the outlook for equity markets on the back of the government’s efforts to tighten liquidity, some observers have pointed to MSCI’s decision on potential A-share inclusion into their global indices as a possible catalyst for fresh inflows.  An announcement is expected on 20 June, but the market is still split on whether the final verdict will be yes or no.

To recap, MSCI decided to postpone its decision to include A-shares into its global indices last June (2016), citing several outstanding issues that needed to be resolved: 1) accessibility of A-shares and capital mobility (repatriation of funds), 2) effective implementation of trading suspensions rules, and 3) resolution of pre-approval requirements around the launch of products linked to indices that include China A-shares.

There’s been some progress on these issues over the past year – particularly accessibility of A-shares with the HK-Shenzhen Stock Connect now up and running (although daily quotas still exist). In addition, a consultation paper issued by MSCI on 23 March, proposing to reduce the eligible universe of A-shares for index inclusion from 449 stocks down to 169 stocks, appeared to improve prospects for inclusion this year.

However, inclusion of A-share is still far from certain, with the issue around pre-approval of products by mainland regulators outstanding. Indeed, at a Bloomberg TV interview on 24 May, MSCI CEO Henry Fernandez highlighted that the pre-approval issue is a “big one”.

Ultimately, whether A-shares are included this year or next year (or even the year after), the key question for us as investors is whether any of this will matter. On a longer term view, it will undoubtedly be positive for Chinese onshore equity markets given potential new inflows. Full inclusion of A-shares into global indices would translate into China representing roughly 35% of MSCI Emerging Market Index (vs 28% now – these are offshore listed Chinese equities, predominantly HK listed shares), and would attract approximately $7bn of passive inflows into the onshore market.

In the short term, however, the impact will be more limited given the plan to introduce the weightings gradually – an initial ‘inclusion factor’ of 5% would put the weighting of A-shares at 0.5% in MSCI EM and 1.8% of MSCI China. To put some context around this, the current weightings of China’s two largest stocks, Tencent and Alibaba in MSCI China are 15% and 11% respectively, vs 1.8% for all A-shares eligible for inclusion (assuming 5% inclusion factor). The initial inclusion will likely not have a big impact on actively managed funds given the small weighting.

As investors, we can already access A-shares via the Stock Connect programs.  What determines our decision to invest is our view about a company’s outlook and the price (valuation) of its stock, not benchmark weightings.

The onshore A-share market offers opportunities to invest in companies that are often not available in the Hong Kong offshore market – notably, the Shenzhen market has many exciting companies in ‘new economy’ sectors such as technology, healthcare, and media. Indeed, we have already invested in some A-share companies in our portfolios, but the key issue is valuation – with ‘new economy’ stocks in many cases trading at multiples of 30-50x future earnings, it’s hard to find a stock which offers good growth at an attractive price.

Ultimately, A-share index inclusion will help to shine some light on China’s onshore equity market and introduce a new set of investors to the market. But in the short term, it’s unlikely to be the catalyst that sparks a re-rating of the market. Instead, investors should look to further market reform and improving prospects for company earnings on the back of those reforms to attract new capital from international investors.

(The views expressed here are those of the author and do not necessarily reflect those of ETF Strategy.)

Tags: , , , , , , ,

Leave a Comment