MSCI announced that it will include China A shares in its benchmark Emerging Markets Index starting in May 2018 with an initial weighting representing 0.73% of MSCI EM. While it is a milestone for the globalisation of the A-share stock market, the initial impact on the broad A-share market will be minimal due to small flows. The inclusion will bring estimated flows of approximately US$3bn passive inflows and $18bn active inflows leading up to the inclusion date. Comments Standard Life Investments.
Given the limited shift in underlying flows the impact on both domestic equities and the currency will likely be limited. At full inclusion, A-shares may account for 20% of MSCI EM but it may take up 10 years to implement, even at full weighting overall inflows will be meaningful but not decisive. Looking at the past experiences of Korea and Taiwan joining MSCI shows that overall fundamentals will be far more influential than index weighting.
That said, the inclusion is positive overall for sentiment and could provide a modest boost to capital markets reform. Inclusion will mean global institutional investors will have a vested interest in driving market reforms such as shareholder rights, limits to voluntary trading, and removing quotas on capital repatriation. Equity index inclusion also could provide a boost to further bond market reforms and efforts to include the Chinese interbank market in global bond indices. Lastly, MSCI’s decision will provide a boost to the political capital of domestic reforms such as the chairman of the China Securities Regulatory Commission (CSRC).
