MSCI to increase China A shares weight in EM and ACWI indices

Mar 4th, 2019 | By | Category: ETF and Index News

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MSCI has announced that it will increase the weight of China A shares in its widely followed MSCI Emerging Markets and MSCI ACWI indices from May 2019.

Remy Briand, MSCI Managing Director and Chairman of the MSCI Index Policy Committee.

Remy Briand, MSCI Managing Director and Chairman of the MSCI Index Policy Committee.

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 $59bn iShares Core MSCI Emerging Markets ETF (IEMG US) and the $10bn iShares MSCI ACWI ETF (ACWI US).

China A large-cap shares were first admitted into these indices in June 2018 at a 2.5% partial inclusion factor which was raised to 5% in September 2018.

According to MSCI, the latest changes involve increasing the inclusion factor to 20% in three steps.

The first step, coinciding with the indices’ May 2019 semi-annual review, will see the inclusion factor increased from 5% to 10%, while ChiNext large-cap shares (ChiNext is a NASDAQ-style board of the Shenzhen Stock Exchange that aims to attract fast-growing enterprises, especially high-tech firms) will also be added at a 10% inclusion factor.

The second step, coinciding with the August 2019 quarterly review, will see the inclusion factor increased from 10% to 15%.

The third step, coinciding with the November 2019 semi-annual review, will see the inclusion factor increased from 15% to 20%, while China A mid-cap shares, including eligible ChiNext shares, will be included at a 20% inclusion factor.

On completion of this three-step implementation, there will be 253 large- and 168 mid-cap China A shares, including 27 ChiNext shares, on a pro forma basis in the MSCI Emerging Markets Index, representing a weight of 3.3%.

According to MSCI, the proposal to increase the weight of China A shares was met by overwhelming support from investors including asset owners, asset managers, broker/dealers, and other market participants worldwide.

Remy Briand, MSCI Managing Director and Chairman of the MSCI Index Policy Committee, commented, “The successful implementation of the initial 5% inclusion of China A shares has been a positive experience for international institutional investors and has fostered their appetite to increase further their exposure to the mainland China equity market.

“The strong commitment by the Chinese regulators to continue to improve market accessibility, evidenced by, among other things, the significant reduction in trading suspensions in recent months, is another critical factor that has won the support of international institutional investors.”

During MSCI’s consultation with investors, MSCI learned that investors would prefer to see the weight of the China A shares increased in three steps rather than in two steps, as originally proposed, so as to alleviate potential execution pressure on the implementation dates.

In addition, a significant proportion of investors also highlighted that China A mid-cap shares should be included jointly with the weight increase in large-caps to allow for a smoother implementation.

While investors are supportive of the increase in the inclusion factor to 20%, many have stressed that future weight increases of China A shares beyond 20% requires Chinese authorities to address a number of remaining market accessibility questions.

In particular, investors would like to see further progress regarding access to hedging and derivatives instruments as well as the alleviation of their concerns over the short settlement cycle of China A shares, the trading holidays of Stock Connect, and the availability of an Omnibus trading mechanism.

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