A-share inclusion in MSCI index underlines super-connector role
This week marks an important milestone for financial markets on the Chinese mainland. Morgan Stanley Capital International (MSCI) decided to include about 200 A-shares in its emerging-market index in phases. The decision is not a surprise; financial markets have been anticipating it. Many international investors will find mainland stocks attractive as indextracking funds need to include mainland stocks in their portfolios for proper weighting. The move will further strengthen Hong Kong’s significant role in the nation’s financial market development and reinforces the city’s position as “super-connector” between the mainland and the rest of the world.
China is now the second-largest economy in the world and its financial markets are becoming more and more significant in the region. However, mainland financial markets still lag behind advanced international markets in terms of regulation. One typical concern for international investors is that the country’s capital account has yet to be fully liberalized. As a result funds cannot be transferred in and out of the mainland freely. MSCI’s inclusion of mainland stocks is not without restriction. When we look at the list of stocks MSCI has included in its emerging market index, all are covered by the Shanghai-Hong Kong Stock Connect. This demonstrates the role of Hong Kong in the nation’s financial and economic development. By listing in Hong Kong these mainland stocks have in effect complied with internationally accepted rules, making them more acceptable to international investors. This in turn underlines Hong Kong’s role as China’s international financial market.
This has also highlighted another role for Hong Kong — being the reliable testing ground for mainland financial reform. The Shanghai-Hong Kong Stock Connect was introduced in 2014. Through this stock link, international investors can trade mainland stocks through Hong Kong. This scheme has enabled a regulated trading mechanism. When MSCI announced the inclusion of mainland stocks in its emerging market index, one notable comment is that the stock connect has facilitated international investor trading of mainland stocks. These mainland stocks’ Hong Kong listings give international investors more confidence in their compliance and supervision. As a testing ground, Hong Kong will continue to provide the nation the needed experience for further liberalizing its financial markets.
The MSCI’s endorsement of Hong Kong as China’s only international financial market also suggests the city will continue to enjoy plenty of The author is dean of the School of Continuing Education at Hong Kong Baptist University.
National economic development gives Hong Kong lots of opportunities by entrusting it with many important roles whereas Hong Kong facilitates national economic development. The Hong Kong government has rightly positioned the city as the superconnector between the mainland and the outside world.
opportunities as the nation further opens up its economy and liberalizes financial markets.
Most important of all, the MSCI move has further underlined the symbiotic relationship between national economic development and that of Hong Kong. National economic development gives Hong Kong lots of opportunities by entrusting it with many important roles whereas Hong Kong facilitates national economic development. The Hong Kong government has rightly positioned the city as the super-connector between the mainland and the outside world. The MSCI move has further substantiated this role. As the Belt and Road Initiative continues to roll out, this super-connector will have more roles to play in facilitating national development, which in turn will provide the city with more growth potential.
The MSCI decision to include mainland stocks in its emerging market index will have far-reaching implications for Hong Kong. We just need to better prepare and equip ourselves for the opportunities ahead.