Mainland Chinese equities to be included into Global Standard Indexes
by Team, KraneShares
On Tuesday afternoon at 4:30 PM EST global index provider, MSCI, announced they will include Mainland Chinese equities (A-shares) tracked by the MSCI China A International Index to their Global Standard Indexes starting in May 2018. These indexes include the MSCI Emerging Markets, AC Asia Ex Japan, and ACWI Indexes#. We believe this historic news will have far reaching implications for global investors in the years to come.
Leading up to MSCI’s announcement, we received a number of questions from our clients about how this might benefit our KraneShares Bosera MSCI China A Share ETF (KBA). We have assembled this FAQ to help answer some of these questions.
What will be the near term implications of the announcement?
We believe the most immediate impact is that global investors need to start preparing to buy into the Mainland Chinese equity market. We also think that this news could provide a positive catalyst for outperformance of the A-share market.
While the MSCI China A International Index is MSCI’s definition of the fully integrated Mainland Chinese equity market, MSCI has reduced the overall number of stocks for the initial inclusion from 448 in 2016, to 222 this year. This reduces the initial weight of China A-shares within the MSCI Emerging Markets Index from 1.0% to 0.73%1. In terms of actual assets, that means about $12 billion in anticipated net inflows; a small amount compared to the total market size of $7 trillion2. We believe that while the initial value is small, the symbolic value is enormous. The first inclusion begins a process that should see China’s weight rise dramatically in the years to come as a larger number of MSCI China A International securities are added.
What will be the long-term implications of the announcement?
Upon full inclusion, which we estimate could take up to five years, the securities tracked by the MSCI China A International Index should grow to represent an additional 17% of the MSCI Emerging Markets Index. This should bring China’s weight overall (including Mainland, Hong Kong, and US listed Chinese stocks) to over 40%3. This could translate to several hundred billion dollars in total inflows from both active and passive managers.
When does inclusion start?
Inclusion will not begin until May 31, 2018. The one year period between announcement and inclusion provides MSCI clients time to adequately prepare for the first inclusion. This initial first step should lead to subsequent increases in A-share exposure in the years to come.
MSCI’s clients who wish to stay within benchmark will have the following options:
- Incorporate an MSCI China A International-linked A-share ETF, like the KraneShares Bosera MSCI China A Share ETF (KBA)
- apply for investment quota via the Qualified Foreign Institutional Investor and Renminbi Qualified Foreign Institutional Investor (QFII & RQFII) programs
- set up trading accounts to buy A-shares via the Hong Kong Stock Connect Programs.
Will MSCI include all the stocks in the MSCI China A International Index?
As MSCI indicated in the March Consultation, they have elected to begin the inclusion of securities within the MSCI China A International Index with a smaller subset of this index. This makes for a more “digestable” first step. Should MSCI decide to launch a provisional version of the MSCI China A International Index, we would evaluate KBA to see if any changes to its objective or strategy may be appropriate.
Will this have any impact on other popular Mainland Chinese equity benchmarks not run by MSCI?
Upon inclusion, many MSCI clients will add securities tracked by the MSCI China A International Index to their portfolios in some shape or form. Passive investors will try to replicate the index as close as possible while active investors must at least consider allocating to the securities in the benchmark. While there may be some overlap with other China A-share indexes, the MSCI China A International Index follows MSCI’s index methodology and represents the definition of full inclusion.
Furthermore, MSCI’s indexes seek to capture the majority of the market capitalization for the country or sector of focus. China has a dynamic and growing capital market which we believe lends itself to MSCI’s methodology. Other popular A-share indexes are limited to a fixed number of stocks, which we believe is a disadvantage in Mainland China.
We are excited for what the future holds for China’s capital markets. Yesterday’s positive MSCI decision was a historic affirmation of how far China has come in its path to fully integrating into global markets. We believe investors will need a China expert to help them navigate China’s economy, capital markets and increased exposure within global indexes. At KraneShares our mission is to serve as a trusted partner for China investment opportunities.
# Index Definitions
MSCI China A International Index: is a free-float adjusted market capitalization weighted index that is designed to track the equity market performance of large-cap and mid-cap Chinese securities listed on the Shanghai and Shenzhen Stock Exchanges. The Index is based on the concept of the integrated MSCI China equity universe with mainland Chinese securities included
The MSCI Emerging Markets Index: captures large and mid cap representation across 23 Emerging Markets (EM) countries.
The MSCI AC Asia ex Japan Index: captures large and mid cap representation across 2 of 3 Developed Markets (DM) countries (excluding Japan) and 8 Emerging Markets (EM) countries in Asia.
MSCI ACWI Index: captures large and mid cap representation across 23 Developed Markets (DM) and 23 Emerging Markets (EM) countries
(June 20 2017), “Results of MSCI 2017 Market Classification Review”, MSCI
Viren Vaghela, “Why Investors in This China ETF Are Betting Big”, (June 14, 2017), Bloomberg
MSCI Research, as of 9/30/2016
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