What China’s index inclusion means

The inclusion of China A-shares in the wider MSCI indexes, an inevitable outcome, will have a profound effect on investors’ portfolios. The steps China needs to make to satisfy investors, and the implications of inclusion, will be discussed at the Fiduciary Investors Symposium at Yale School of Management in October.

MSCI announced in June it would delay the inclusion of China A-shares in its emerging markets index. Around $1.5 trillion is benchmarked to this index.

The current proposal, which has not yet been approved, is for a partial or 5 per cent inclusion. This would see the number of constituents increasing from 155 (overseas listed Chinese companies) to 609.

A potential full inclusion of China would mean an abolishment of the quota system, full liberalisation of capital mobility restrictions and alignment of international accessibility standards. If these requirements were met, a full inclusion would mean China would make up nearly 40 per cent of the emerging markets index. This could have a huge impact on investors’ portfolios.

In announcing the delay, Remy Briand, MSCI’s global head of research, said that international institutional investors had indicated they wanted to see further improvements in the accessibility of the China A-shares market before its inclusion. This included investors’ ability to move funds in and out of China and a desire to see whether new stock suspension rules were enforced.

MSCI has said it would review China-A shares again next year, but did not rule out a potential inclusion before then if changes were made.

Briand will be part of a discussion on the impact on investors’ portfolios of the inclusion of China in the emerging market index at the Fiduciary Investors Symposium at Yale School of Management from October 23-25.

Also joining the discussion will be Professor of Finance at Yale, Zhiwu Chen, who is an expert on finance theory, securities valuation, emerging markets, and China’s economy and capital markets.

For the past 15 years Chen has focused on investigating market development and institution-building issues in the context of China’s transition process and other emerging markets.

He asks: What institutions are necessary for markets to develop? Why is finance important for society? How does financial development affect social structure and individual freedom?

The panel will also hear from Stephen Kotkin, Professor in History and International Affairs at Princeton University, who specialises in geopolitical risk and will explore the history of China and its influence in the world.

David Tien, senior portfolio manager within global tactical asset allocation at the Canada Pension Plan Investment Board will explore the impact on broader equity markets of China’s declining growth, and the impact on investors when China’s share of the broader market indexes increase.

For the full program and to register for the Fiduciary Investors Symposium at Yale School of Management from October 23-25 visit www.fiduciaryinvestors.com