To paraphrase the early cast of the TV show Saturday Night Live, China’s domestic stock markets were not ready for “prime time.” At least that was the view of MSCI. The index provider has long viewed Chinese markets warily, due in part to past incidences of fraud among public companies. Exclusion from the MSCI indexes was a big deal because the investment weightings made by hundreds of active and passive funds rely on those indexes.
It appears China is ready for a greater prime-time role after MSCI’s moves to boost the presence of China’s A-shares in some of its indexes. Last May, it said it would add 234 A-shares to certain indexes. And late last month, it laid out plans for a three-step process to increase the index weightings of these 234 companies, including in the widely benchmarked MSCI Emerging Markets Index.
A-shares are stocks that trade on domestic exchanges in Shanghai and Shenzen. Previously, only Chinese firms listed in Hong Kong and the U.S. received the MSCI imprimatur.
What changed? Well, jawboning from the Chinese government officials probably had an impact. The Wall Street Journal last month reported that China pressured MSCI to add the country's domestic-listed stocks to its indexes. In the February press release announcing the three-step process to increase the weighting of A-shares, MSCI said its decision won “overwhelming” support from investors that includes international institutions, asset managers and broker-dealers.
Beyond that, Brendan Ahern, chief investment officer at KraneShares Advisors LLC, posits that Chinese markets have matured and now meet the exacting accounting and regulatory standards that global investors expect.
A-shares have typically been mostly owned by Chinese retail investors, says Ahern. At times, these investors have aggressively moved in and out of markets, creating heightened volatility.
“Opening up the A-shares market to more foreign investors should bring stability over time,” he says. By the time the reweighing process involving A-shares is fully implemented around 2023, Chinese A-shares should make up more than 16 percent of the MSCI Emerging Markets Index, augmenting the sizable existing exposure to Hong-Kong-based Chinese firms.
The move is a long time coming, says William Sokol, director of ETF product management at VanEck.
“The A-shares market is huge, with a market cap of over $6 trillion, which is second only to the U.S.,” says Sokol.
By Ahern’s estimate, roughly $70 billion will be spent globally by passive funds that aim to mimic the changing MSCI emerging-market indexes. And that doesn’t even account for the larger pool of resources invested by actively-managed emerging-market funds that may also boost their A-shares exposure.