MSCI will be patient with A-Shares

The inclusion of small- and mid-cap China A-Shares in the MSCI Emerging Markets Index will depend on investors’ experience with the initial 226 large caps, MSCI’s head of research, Asia-Pacific, Chin Ping Chia, says.

Subsequent additions to the index, which has $1.9 trillion in assets benchmarked against it, will require further reforms of the China A-Shares market, to reduce accessibility frictions and barriers, Chia says. Much of the responsibility for reviewing these companies lies with China’s financial regulator, the China Securities Regulatory Commission, he added.

A-Shares inclusion strategy

MSCI’s approach to A-Shares inclusion has been somewhat cautious and, therefore, done in phases, as it expects A-Shares could one day make up more than 40 per cent of the total Emerging Markets Index.

The gradual phasing in of these shares also gives investors more time to prepare for the weighting to Chinese companies, Chia says.

MSCI applies the same methodology for all of its indices, with the aim of capturing 90 per cent of the eligible investment opportunities in a given country, head of ESG and real estate at MSCI, Remy Briand, says.

“In the case of China, because there were constraints due to the access channel, we applied the same methodology up to a point,” Briand explains. “The point was then to limit the [inclusions] in the first phase to large companies. We essentially split the demand to buy into A-Shares.

“As we look at the full inclusion, which may take years, it will depend on how quickly China opens up. Then we will talk about other batches of companies, mid-cap and eventually small-cap as well. It may happen quickly, it may happen slowly, it may never happen.”

For now, the initial inclusion has been a success, despite concerns, Briand says.

“What we’ve heard from the various market participants is the actual implementation of the inclusion went very smoothly,” he says. “When trading happened, it went smoothly, to the credit of all the market participants.”

The suspension question

Chinese companies that suddenly suspend trading for weeks or months pose an ongoing problem for both MSCI and investors of the index, mainly because it temporarily cuts off access. There’s also no definitive reason why suspensions occur, which can leave investors in the dark about what’s happening inside these companies.

Suspensions have, therefore, become a focal point for MSCI and tighter rules around them must be created before further A-Shares companies are added to the index, Briand says.

“It’s up to the [Chinese regulatory] authorities to ensure that the number of suspended stocks decreases, because it is a characteristic of the China A-Share market,” Briand says. “There are actually a lot of suspensions and some of them can be for a very long time, which is making the problem worse. So, yes, that’s something that would need to improve.”