MAKING CHINA SIMPLE AGAIN
Emerging Markets may never be the same: What China A Inclusion Could Mean for Investors
The world is coming to China. As one of the greatest growth stories since the early 1980s, China’s equity market accounts for nearly 30% of the emerging markets and is simply too big to ignore. China is large, complex and fast moving. How can investors make sense of this rapidly expanding market?
Investors can access the Chinese equity market through several share classes, the largest being A shares – those that trade in mainland China on domestic exchanges. On May 31, MSCI will partially include 226 China large-cap A shares in the MSCI Emerging Markets Index. Nearly $2 trillion tracks the regional index, representing over 85% of all emerging market equity fund assets.1 Both passive and actively managed portfolios likely will expand into these stocks, which have been historically available to Chinese investors alone. Under the current partial inclusion plan, China A shares will have a weight of 5% this year (split into two phases). In the event of full inclusion, China equities would exceed 40% of the MSCI Emerging Markets Index.2
The Journey to Inclusion
As MSCI’s Chin Ping Chia writes in his latest blog post, The World Comes to China, the journey to inclusion of China A shares began nearly five years ago. MSCI has been working closely with market participants and stakeholders to ensure that the upcoming partial inclusion of A shares into the MSCI Emerging Markets Index goes smoothly, and continues to hold the view that better access to all investors is beneficial to the markets in general.
MSCI CHINA: Extensive Access to the Growing China Equity Market
MSCI China indexes are built on quality-reviewed, enriched datasets backed by 99.96% accuracy levels in index production3. They are calculated using a fully transparent and innovative maintenance methodology with a strong emphasis on enhancing investability and replicability through the use of stringent size and liquidity screens. The indexes aim to reflect the performance of a range of opportunity sets of Chinese companies, listed inside and outside China, in the form of different share classes. The flagship China indexes are:
The MSCI China Index is constructed based on the integrated China equity universe included in the MSCI Emerging Markets Index, providing a standardized definition of the China equity opportunity set. The index aims to represent the performance of large- and mid-cap segments with H shares, B shares, red chips, P chips and foreign listings (e.g., ADRs) of Chinese stocks. China A shares will be partially included in this index, making it the de facto index for all of China. It can be used as a China benchmark for investors who use the MSCI ACWI Index or MSCI EM Index as their policy benchmark.
The MSCI China A Index is designed to represent the performance of large-cap and mid-cap China A shares that can be accessed through the Stock Connect Program (China’s cross-border trading channel between Hong Kong and mainland exchanges).
MSCI is committed to delivering innovative solutions that integrate risk and performance analysis for the opportunities and challenges ahead.
Chinese Alphabet of Share Classes
The world comes to China
On May 31, MSCI began to partially include China A shares to the MSCI Emerging Markets Index. Marking the significance of this occasion, James P. Gorman, Chairman & CEO, Morgan Stanley, Larry Fink, Chairman & CEO, BlackRock, and Andrew Lo, Head of Asia Pacific, Invesco, shared their insights in a video that played at the Shanghai Stock Exchange ceremony.
- A Shares: China securities incorporated in Mainland China, listed on the Shanghai or Shenzhen Stock Exchange and traded in Renminbi (RMB).
- B Shares: China securities incorporated in China and listed on the Shanghai Stock Exchange (USD) or Shenzhen Stock Exchange (HKD).
- H Shares: China securities incorporated in Mainland China, listed on the Hong Kong Stock Exchange and traded in HK Dollars (HKD).
- Red-Chips: China securities of state-owned companies incorporated outside Mainland China, listed on the Hong Kong Stock Exchange (HKD).
- P-Chips: China securities of non-government owned companies incorporated outside Mainland China, listed on HK Stock Exchange (HKD).
- Overseas-Listed: China securities (including ADRs) listed on foreign exchanges outside of Mainland China and Hong Kong (traded in USD, SGD, KRW etc.)
1 As of December 31, 2017, as reported on March 31, 2018 by eVestment, Morningstar and Bloomberg.
2 China would comprise 31.3% of the MSCI Emerging Markets Index at 5% inclusion as of August 2018 (left panel), based on data used for MSCI’s May 2018 Semi-Annual Index Review. At a hypothetical 100% inclusion (which may or may not occur in the future), China would comprise 42% of the index, based on the current market capitalization. All figures are approximate.
3 Accuracy calculated internally based on the number of corrections performed over total number of securities or data points covered.