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MSCI adds China A shares to index

21 June 2017

China was already over 27 percent of the MSCI Emerging Market index, so this won't be a huge change. "Obviously, over time, the further involvement of global active funds in the A share market will benefit companies with superior fundamentals rather than simply thematic stories".

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 global institutional investors with whom MSCI consulted, primarily as a result of the positive impact on the accessibility of the China A market", MSCI said in a statement. MSCI has highlighted the potential for disruptions to offering existing financial products based on the MSCI EM Index if a Chinese exchange denies approval of MSCI's licensing of that index. It will definitely now put Chinese companies on the map, these companies which were seen to be largely the domain of retail investors.

With a 5 percent initial inclusion factor, the eligible A-shares would represent less than 1 percent in the MSCI Emerging Markets index, which indeed does not match China's weight in the global economy and markets.

"We believe this was due to foreign investors' expectation that MSCI will announce the inclusion of A-shares this week", said UBS strategist Gao Ting, noting that northbound investors have mostly chosen shares in the consumer and pharmaceutical sectors over the past month. The inclusion will start slowly but will ultimately be around 40 per cent of the MSCI Emerging Markets Index.

The People's Bank of China injected a net liquidity of 110 billion yuan (US$16 billion) into the financial market through reverse repos yesterday.

"Speculation on MSCI inclusion is boosting Chinese shares in the short term", said Ronald Wan, chief executive at Partners Capital International Hong Kong.

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But for the most part they have been restricted to "B" shares denominated in United States or Hong Kong dollars and traded in Shanghai and Shenzhen, or "H" shares traded in Hong Kong.

By opening up the mainland market through the Shanghai-Hong Kong Stock Connect in 2014 and the Shenzhen-Hong Kong Stock Connect past year, the central government has gradually eased capital restrictions and investment quotas.

"The A share inclusion is very symbolic as it marked a significant enhancement of accessibility of the A-share markets for foreign investors".

The company's stock had a trading volume of 71,371,986 shares. Shenzhen is home to many Chinese internet, advanced technology and software start-ups. Similarly, MSCI is still reviewing the impact of currency changes in Nigeria.

Watch for some weakness in the value of the Aussie dollar over time as well as investors sell local investment to redeploy funds into China to achieve index weighting. tracker or passive funds will be most notable. "We must continue to make efforts to further strengthen the market through reforms and build investor confidence so that we may maximize our position in 2018 to be formally listed alongside other global markets in MSCI's Emerging Market Index".

If a deal is finally hammered out, A-shares would account for just 0.5 percent of the MSCI Emerging Markets Index.

MSCI adds China A shares to index