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Will be MSCI be listed in Chinese mainland A-shares?
Published on: 2017-06-16
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081June 20th will be a watershed moment for Chinese stocks and Chinese investment, for good or for ill. The day marks the decision on whether or not MSCI will list Chinese mainland A-shares stocks into its famous iShares MSCI Emerging Markets ETF (EEM). These A-shares are essentially stocks bought and sold on the Shenzhen and Shanghai exchanges which are not allowed to be bought and sold by foreign investors. Juxtaposed to B-shares, stocks bought and sold on mainland markets which can be sold by foreigners, A-shares are truly considered to be a potential goldmine for foreign investors with a bit more appetite for risk and growth.


While the firm has not included these A-shares on its huge EEM fund which has unequivocally outperformed its peer emerging market funds, the exclusion of A-shares is increasingly looking like it will change as has been anticipated by analysts and investors the world over. In conjunction with this inclusion come a number of positive signs for investors.


First, the framework under which investors would have access to these A-shares, a platform called Stock Connect, has no quota requirements, is open to all investors without a license, has no restrictions on capital mobility, and is essentially freely open offering investors a large degree of liquidity and easy currency convertibility. Secondly, and more attractively, MSCI is looking to only add large cap stocks into its EEM fund as Chinese large-caps are likely to be the most profitable over the coming year according to analysts as Blackstone.


In spite of all this positive news, its probably best not to throw all of your money into MSCI's highly successful emerging market fund just on the basis of the decision on the inclusion of A-shares. While the decision in the affirmative of the inclusion of A-shares would likely give the fund a short-term positive boost, the implementation of A-shares into the EEM portfolio would probably not be until June of 2018, at least according to Nick Yeo at Aberdeen Asset Management.

082Furthermore, movement in the EEM fund is susceptible to much more than just Chinese macroeconomics or Chinese B-shares. The fund is one of the most diverse emerging market funds with equities throughout Asia (mostly), but also is invested in companies in South Africa, India, Mexico, Brazil, Russia, Turkey, and others. Because of this, the fund is extremely diverse and will likely not be too influenced, at least in the short term, merely on the decision to include A-shares into the fund which won't even be absorbed into the investment strategy for some time.


On top of all this, the A-shares under consideration is a short list since MSCI is seemingly setting a high bar for stocks they are willing to implement into the portfolio. Business Insider has reported this list is limited to only around 100 or so funds, most of which will only be slightly invested in. Because of this, at the end of the day the A-shares may only make up around 1 or 2 percent of the entirety of the fund's investment strategy, which is also highly subject to change since it is quite an active fund or a fund that oftentimes divests and reinvests depending on various components.


080At the end of the day, is the inclusion of A-shares into MSCI's fund really all that important? All the talk in the chattering class as of now seems to be highly centered on this inclusion. In sum, yes it is a very important for the fund despite the A-shares potential share into it. The move marks a significant turning point into deregulation into the Chinese financial markets based on the higher standards in which the country is forcing its state-owned enterprises to uphold. These moves towards deregulation of China's capital account will hold reverberations throughout the entire financial system and in turn the entire economy. The long and incredibly incremental march towards liberalization may appear to be insignificant, but it is not. Each decision in the direction of deregulation is important for the healthy maturation of China's economy. This is just another component of this general trend.


MSCI's emerging market fund is already fundamentally a China-oriented one since eight out of the top ten most invested in equities are either in China or Taiwan. This step to implement A-shares will only solidify this trend. Furthermore, the move is highly anticipated and can only be interpreted as a positive sign for the fund and also China's market reform. Investors should hope the move is established if they are also investors looking to cash in on China's recent equity resurgence.

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