Mainland China shares make it to MSCI

New York-based MSCI on Tuesday agreed to include the so-called China-A shares in its global indices. About 234 largecap stocks listed in mainland China will be partially included in the MSCI global and regional indices from June 1.

Initially, the weight of the shares in the MSCI Emerging Markets (EM) Index will be only 0.39 per cent because of the 2.5 per cent partial inclusion factor. In September, this will increase to 0.78 per cent as MSCI increases the inclusion factor.

With time, given the huge size of the Chinese market, the shares’ weight in the MSCI EM index, tracked by global funds with assets of an estimated $1.5 trillion, will increase to 16 per cent, triggering billions of dollars of foreign inflows.

The increase, however, will come at the cost of other markets. Markets, including India and South Korea, will see their weight in the MSCI EM and the MSCI Asia indices reduced to accommodate China.

In a recent note, Morgan Stanley had said India’s weight in the MSCI EM Index could fall by about 20 basis points in The global index provider announced changes to its MSCI India Domestic Index and MSCI India Domestic Small Cap Index. It added four stocks — Avenue Supermarts, Biocon, HDFC Standard Life and InterGlobe Aviation to its Domestic Index, while it removed three stocks, which include IDFC Bank and Vakrangee. Meanwhile, it added 30 stocks to the Small Cap Index and removed 15. Shares of Avenue Supermarts gained more than four per cent following the rejig. The freshly added stocks will see capital inflows, while those deleted will see outflows as exchange-traded funds (ETFs) rebalance their holdings to adjust to the changes.

September. This could imply capital outflows of $450 million, it had said.

For years, China had been lobbying with the MSCI to include its locally traded shares to the latter’s major indices. But, the MSCI had been deferring the move as the government’s control over its financial markets restricted access to overseas investors. The latest move by the MSCI is a stamp of financial credibility that will open China to more global investments. The MSCI decision comes after the Asian giant improved market access for global asset managers by letting foreigners buy shares on the Shenzhen stock exchange.

China still has work to do before the MSCI further increases the weighting of its shares. The country still imposes some restrictions such as the 10 per cent daily limit in stock moves that quash trading volatility, and a cap on foreign ownership.

The MSCI is the world’s biggest index compiler.