Chinese equities have been granted a place in the MSCI Emerging Markets index, a move that is expected to raise investment in the country´s stock market.
MSCI claimed its decision had broad support from institutional investors owing to the much-improved access to mainland Chinese equities, known as A-shares.
The move means that a large number of passive investment managers will be compelled to buy Chinese A-shares for the first time. It is estimated that around $1.6tn of investment funds currently track the MSCI emerging markets benchmark.
Cutting red tape
Investors had previously blocked the inclusion of China A-shares in the index due to excessive red tape and associated costs.
However, MSCI said institutional investors were backing the decision because of the success of the Stock Connect programme, which links Hong Kong with Shanghai and Shenzhen without investors having to adhere to the capital restrictions on the mainland.
Over the past year, Chinese stock exchanges have also reduced the compliance measures for index-linked products.
“International investors have embraced the positive changes in the accessibility of the China-A shares market over the last few years and now all conditions are set for MSCI to proceed with the first step of the inclusion.” said Remy Briand, MSCI managing director and chairman of the MSCI Index Policy Committee.
There is huge potential for growth in the amount invested by global investors in Chinese equities. At present, foreign investors own less than 2% of Chinese stocks, despite the country´s status as the second largest equity market in the world.
The move also comes at a time when the Chinese government is increasingly keen on attracting foreign investment in the country, especially as the authorities are seeking to reduce domestic borrowing.
In all, MSCI will include 222 A-share large-cap Chinese stocks in its emerging markets benchmark with effect from June, 2018. It represents around 0.73% of the weight of the MSCI Emerging Markets index.
Chinese equities rallied during today´s trading session, closing at their highest level since December 2015.