As A-Shares Inclusion Nears, This ETF Is Getting Bigger

Daniel Fowler
June 2, 2018

Global index provider MSCI Inc. added around 230 mainland-listed Chinese stocks to its flagship Emerging Markets Index, and other indexes, a move expected. Among the countries that could see their weights capped are Brazil and India, two of the largest developing economies.

Wong said that despite MSCI's imprimatur, foreign investors remain cautious over China's volatile equities, where government meddling and the irrational decisions of millions of individual retail punters often trump fundamentals.

MSCI is slated to start adding A-shares to its emerging markets benchmark on June 1 with a second inclusion round scheduled for September 1.

That number had been 234 shares, but late on Wednesday, MSCI tweaked the inclusion list, dropping telecom equipment and smartphone maker ZTE, which has been buffeted by trade frictions between China and the United States, and four other companies, whose shares have been suspended.

If these first additions go smoothly, there is potential for full inclusion at a later date, which would bring the weighting of A-shares in the EM index to 16.2% and the overall China weighting to more than 40%. However, GIFT City is not yet a credible alternative to India's established equity bourses.

However, if China continues to liberalize its markets and MSCI greenlights further A-shares inclusion for its indices, China's weighting in the Emerging Markets Index could jump significantly.

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While certainly symbolic, the question now is whether such a modest inclusion of A-shares into MSCI indices is impactful for investors.

The inclusion "provides a much broader range of selection for global investors when they try to access the China market" and is "a very important step in China's capital account opening-up process and a symbolic event of capital market connectivity between China and the world", according to JP Morgan. AGF Investments Inc. now owns 1,834,482 shares of the exchange traded fund's stock worth $55,842,000 after purchasing an additional 1,382,868 shares during the last quarter.

The Shanghai Composite Index stumbled 0.66 percent lower, or 20.33 points, to 3.075.14 and the Shenzhen Composite Index, which tracks stocks on China's second exchange, slipped 1.20 percent, or 21.22 points, to 1,746.33.

"It's less about integration than about maturity within China", Wheatley told Bloomberg Television. It was the fourth time inclusion had been considered.

Silvers said rather than improve corporate governance, MSCI's imprimatur may do the opposite. Without giving any definitive timetable, Pettit also suggested a full inclusion of A shares is possible in future.

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