The decision by MSCI last week to include China’s A-shares into its Emerging Markets and ACW indices from summer 2018 was welcomed by investors as a “watershed moment for global equity investors”, but the real impact on investment vehicles, including exchange-traded funds, is likely to be muted for some time.
The index provider has finally decided to include Chinese A-shares into a number of its indices, after three years of failed attempts, but at this stage the amount is really small. MSCI will initially include 222 China A large-cap stocks, which will make up just 0.73% of its Global Emerging Markets index, though this is expected to grow in the future.
Eng Tech Tan, senior portfolio manager of Asian equity at Nikko Asset Management, says the initial impact will be muted, because the total market capitalisation of the stocks to be included – $700bn – is “miniscule” compared to the overall market cap of the domestic Chinese market, which houses some 3,600 companies with a market cap of $6.9trn.
The manager also points out only stocks which can be traded through the Stock Connect programme in Hong Kong are included, which are expected to attract around $7bn of flows on implementation, which represents less than 10% of a single day’s trading turnover in China.
Flows muted for now
ETF flows have reflected this dynamic by remaining muted. Ahead of the announcement, ETFs tracking China stocks saw €14.5m of outflows on Friday 16 June, according to TrackInsight data, as investors displayed doubts about the outcome of MSCI’s much-anticipated review.
Since then, flows have picked up, with €12.7m of inflows on the day of the announcement (20 June) and another €3.7m the following day, but the amounts invested remain low compared to other asset classes.
Apart from the fact the initial allocation to A-shares by the MSCI is small, investors are also undoubtedly aware than any impact will only begin to be see in May 2018, when the index provider begins integrating the shares into its benchmarks.
However, another reason is that investors have had access to Chinese A-shares through ETFs for some time. TrackInsight currently lists six ETFs investing in mainland Chinese stocks, though none of them have been rated at this stage.
Two of them: LYXOR UCITS ETF CSI 300 A-SHARE – C – USD and iShares MSCI China UCITS ETF – A – USD, are available to UK and European investors.
Milestone moment for China
So what does MSCI’s inclusion of Chinese A-shares really change?
Well, for one thing, as explained by Danny Dolan, managing director of China Post Global, it is “a significant and highly symbolic recognition of China’s importance to the global economy, and a big vote of confidence in the Chinese growth story from MSCI and its clients”.
It is also expected to accelerate future market reforms by the Chinese government, including new efforts to provide international investors with direct access to A-shares, the implementation of Bond Comment and updates on a proposed ETF Connect programme, which would extend mutual fund market access to ETFs.
Thus, although the immediate impact may be muted, the long-term implications of this step are not to be underestimated and are likely to drive flows into China stocks in the long run.