MSCI Inc. has successfully completed the third and final phase of the 20% partial inclusion of China A shares in the MSCI indexes, including in the MSCI Emerging Markets Index.
As of the close of markets on November 26, the MSCI indexes will include 472 China A shares, comprised of 244 large-cap and 228 mid-cap securities. The weight of China A shares in the MSCI ACWI and MSCI Emerging Markets Indexes will reach 0.5% and 4%, respectively. The MSCI China Index, which includes China A shares and offshore listed shares, will include 710 securities representing 4% and 34% of the MSCI ACWI and MSCI Emerging Markets Indexes, respectively.
As previously stated, any further inclusion of China A shares in the MSCI Indexes would follow a public consultation and be reviewed against the progress made towards addressing the remaining market reforms highlighted by international institutional investors. During MSCI’s most recent public consultation on China A inclusion, investors stressed the need to resolve the following concerns ahead of consideration of further inclusion:
• Access to hedging and derivatives instruments: International institutional investors require liquid on and offshore index futures and options contracts in order to expand their allocation to China and manage their increased exposure. Index futures and options contracts are critical risk management tools for global investors, particularly for complex, deep and varied equity markets such as in China.
• Short settlement cycle for China A shares: International institutional investors have highlighted that they continue to face significant operational challenges and risks in dealing with the short settlement cycle of China A shares. China currently operates on a T+0/T+1 non-Delivery versus Payment (non-DVP) settlement cycle. Most markets in the MSCI ACWI operate currently on a T+2/T+3 DVP settlement cycle.
• Trading holidays of Stock Connect: International institutional investors are concerned with the misalignment between onshore China and Stock Connect holidays. Given that most global institutional investors currently rely on Stock Connect as the primary access channel for China A shares, it is important that the current trading holiday arrangement be reviewed to minimize unnecessary investment frictions.
• Availability of omnibus trading mechanism in Stock Connect: Many large fund managers and broker dealers have highlighted the pressing need for a well- functioning omnibus mechanism. The ability to place a single order on behalf of multiple client accounts is critical to facilitate best execution and lower operational risk to international institutional investors.
MSCI will launch a public consultation on further inclusion of China A shares in MSCI Indexes only after all the above-mentioned concerns have been addressed by the Chinese authorities in order to continue to facilitate international investment.