After years of toiling with the idea, the world’s leading index provider will include Chinese A shares in their emerging market index. The MSCI Emerging Market benchmark will soon have a 0.73% weighting to 222 China A Large Cap stocks to start.
The decision is a way to slowly include the opaque market, due to its ever increasing world presence. MSCI at first struggled with adding A shares to the index, citing a large number of trading suspension in individual issues and reparation limits.
As protection, MSCI says they will “include China A Large Cap shares of companies that already have H share equivalents in the MSCI China Index.” H shares are firms listed on the Hong Kong Stock Exchange, so there is effectively a hedge available for investors if there is a halt in trading activity.
Market implications are vast, as this is a step to include the largest emerging market in the word. MSCI claims that 1.5 Trillion USD in assets is benchmarked to the MSCI Emerging Market Index, so a small change has a large impact within the investment community for both passive and active managers. Currently, China represents approximately 27% of the index when weighting to the countries. For additional context, South Korea exposure is 15% and Taiwan is 12% – so the benchmark is invested a lot to Asian countries. But MSCI might be late to the China A trend.
One of the largest competitors to MSCI is FTSE Russell. FTSE Russell has an emerging market index that has included these shares for some time now. One of FTSE’s benchmark products is the “FTSE Emerging Markets All Cap China A Inclusion Index”. This benchmark is a market-capitalisation weighted index representing the performance of large, mid and small cap stocks in Emerging markets too.
Some of the largest holdings in the MSCI and FTSE benchmarks are Tencent, China Mobile, China Construction Bank, and Naspers. Moreover, when looking into the sector weights of these companies, IT/Tech is about 25% and financials is another 23% of the MSCI EM Index specifically.
Irrespective of your benchmark provider, the macro trend is that Chinese stocks are opening up and investors will be gaining exposure to new markets.