MSCI to include China A shares in EM and ACWI indices

Jun 21st, 2017 | By | Category: ETF and Index News

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MSCI has announced that it will include China A shares in its widely followed MSCI Emerging Markets and MSCI ACWI indices from June 2018.

MSCI to include China A shares in EM and ACWI indices

Remy Briand, MSCI Managing Director and Chairman of the MSCI Index Policy Committee. (file image © MSCI Inc.)

These benchmarks, and their sub-indices, form the underlying reference indices for countless billions of dollars of assets under management, including giant ETFs such as the $32bn iShares Core MSCI Emerging Markets ETF (IEMG) and the $7bn iShares MSCI ACWI ETF (ACWI).

MSCI said that it had received broad support from institutional investors with whom it consulted, primarily as a result of the positive impact on the accessibility of the China A market of both the Stock Connect programme and the loosening by the local Chinese stock exchanges of pre-approval requirements that can restrict the creation of index-linked investment vehicles, such as ETFs, globally.

Consequently, the index provider plans to add 222 China A Large Cap stocks, representing on a pro forma basis approximately 0.73% of the weight of the MSCI Emerging Markets Index at a 5% partial inclusion factor. A two-step inclusion process will be used to account for the existing daily trading limits on Stock Connect.

The first inclusion step would coincide with its May 2018 Semi-Annual Index Review followed by the second step which would take place as part of the August 2018 Quarterly Index review. The firm said it reserves the right to revise the planned implementation to a single phase should the daily limit on Stock Connect be abolished or significantly expanded before the scheduled inclusion dates.

Remy Briand, MSCI Managing Director and Chairman of the MSCI Index Policy Committee, said, “International investors have embraced the positive changes in the accessibility of the China A shares market over the last few years and now all conditions are set for MSCI to proceed with the first step of the inclusion. The expansion of Stock Connect has been a game changer for the market opening of China A shares.”

Briand added, “When further alignment with international market accessibility standards occurs, sustained accessibility is proven within Stock Connect and international institutional investors gain further experience in the market, MSCI will reflect a higher representation of China A shares in the MSCI Emerging Markets Index. MSCI is very hopeful that the momentum of positive change witnessed in China over the past years will continue to accelerate. ”

International institutional investors have welcomed the expansion of Stock Connect and viewed it as a more flexible access framework compared to the current QFII and RQFII regimes. They have also welcomed the decrease in the number of suspended China A shares, but continue to view the number of suspensions as an outlier compared to other international markets. Investors encouraged the Chinese authorities and exchanges to consider additional measures to address the issue of suspensions.

According to MSCI, further inclusion of China A shares will be subject to a greater alignment with international market accessibility standards, the resilience of Stock Connect, the relaxation of daily trading limits, continued progress on trading suspensions, and further loosening of restrictions on the creation of index-linked investment vehicles.

Commenting on the announcement, Danny Dolan, Managing Director of ETF issuer China Post Global, said, “This is a significant and highly symbolic recognition of China’s importance to the global economy, and a big vote of confidence in the Chinese growth story from MSCI and its clients.

“It’s also worth noting that this is by no means the end of the road for China: the government has already indicated it intends to continue its ambitious programme of market reforms and internationalisation, and this latest development is only likely to increase the pace of new initiatives.

“In particular we’re expecting to hear more on new efforts to provide international investors with direct access to the China A-shares market, following the success of the Shenzhen and Shanghai Stock Connect programmes as well as the implementation this year of Bond Connect and updates on a proposed ETF Connect.

“We see this as the start of a virtuous circle, where over time the number and weighting of Chinese companies represented in the MSCI EM index will gradually increase as international investment grows and large institutional allocations in particular become more commonplace.”

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