MSCI to add mainland China shares to key benchmark

In a landmark moment for Chinese stocks, 222 companies will become part of MSCI's emerging Markets Index, after three years of being snubbed.
The MSCI logo is seen in this illustration photo.
The MSCI logo is seen in this illustration photo.PHOTO: REUTERS

NEW YORK (REUTERS) - US index provider MSCI said on Tuesday (June 20) it will add mainland Chinese stocks to one of its key benchmarks, in a landmark decision for the global investment landscape and the Chinese government.

The full inclusion of domestic Chinese stocks in the widely Tracked MSCI Emerging Markets Index could pull more than US$400 billion (S$553.5 billion) of funds from asset managers, pension funds and insurers into mainland China's equity markets over the next decade, according to analysts.

MSCI's decision to give so-called Chinese "A" share the green light - after having rejected them for three years - represents a symbolic victory for the Chinese government, which has been working steadily over the past few years to open up its capital markets.

"This decision has broad support from international institutional investors with whom MSCI consulted, primarily as a result of the positive impact on the accessibility of the China A market of both the Stock Connect program and the loosening by the local Chinese stock exchanges of pre-approval requirements that can restrict the creation of index-linked investment vehicles globally," MSCI said in a statement.

The company has been in discussions with Chinese regulators and global investors for nearly four years on whether to add yuan-denominated shares listed in Shanghai and Shenzhen to the benchmark. It had left them out because of concerns over restricted access to China's equity markets.

In March, however, MSCI moved to relax its investment criteria by cutting the number of stocks to 169 from 448 in a bid to address curbs on repatriating capital from China and concerns over the country's high number of suspended stocks.

The revised proposal helped address these issues because the 169 stocks can be easily accessed by foreigners through the "Stock Connect" link launched in 2014 and significantly expanded in December.

MSCI said it planned to add the 169 stocks - which will have an initial weighting in the index of just 0.5 per cent - and will begin a review of the "A" shares and include them in provisional indexes beginning in August.

"The initial impact on the composition of regional and global indices will be extremely modest," said Nick Beecroft, portfolio specialist of Asian equity at T. Rowe Price in Hong Kong. "However, over the long term, assuming further liberalization and regulatory reform of the mainland stock markets, the depth of China's A-share market could mean China gains substantial weight within those broader indices."