Glass Half Empty Or Half Full? China's $7 Trillion Worth of Stocks Remain Out of Reach 1

Access to China A-shares

MSCI’s Emerging Markets Index (EEM) consists of 23 countries and represents 10% of the global market capitalization. However, it doesn’t include China A-shares, thus debarring investors from access to a wide variety of yuan-denominated Chinese stocks.

It is not that these stocks are completely inaccessible, though. In order to make its securities more available, China had linked the markets of Hong Kong and Shanghai in 2014 via the Shanghai-Hong Kong Stock Connect program. In 2016, the country launched the Shenzhen Stock Connect program, thus providing access to its second biggest stock market.

Investors do not require a license to buy Chinese stocks via these Connect programs and are not subject to quota restrictions.

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However, as the Wall Street Journal had reported last year, investors from mainland China were more active than foreigners in using the Shanghai-Hong Kong Stock Connect. There was hope that with the inclusion of China A-shares in the MSCI Emerging Markets Index, investors will get hassle free and automatic access to these stocks by investing in products that track the index.

Glass half empty or half full?

The 169 stocks that MSCI has proposed to include in the Emerging Markets Index are comprised of only large cap companies which are already accessible via the aforementioned two programs. Further, companies whose shares are already accessible to investors via their listing in Hong Kong and stocks that have been suspended for more than 50 days would be excluded from consideration.

These proposals may come as a dampener to those who were expecting easy access to about $7 trillion worth of stocks listed on both of China’s exchanges. The proposed weight of 0.5% in the Emerging Markets Index would also be disappointing.

However, there’s a positive side to it. After three consecutive years of being rejected on various grounds, China A-shares could finally make their debut in the Index. In this time, Chinese securities regulators have continued to take concrete steps to make their stock markets more accessible.

This may be a good place to start for both MSCI and China A-shares. Given the size of China’s market, it would probably be better if there was a gradual increase in the number of stocks included. China could then continue to address the concerns of fund managers, rather than getting full blown access right away which could present unique challenges that investment vehicles may not be prepared for.

Further, while deciding not to include A-shares in the Index in 2016, MSCI informed that the decision can be taken out of turn as well. With the Shenzhen Connect having been initiated just last November, global investor interest in the facility going forward could be a factor which may push an out of turn inclusion of the remaining stocks in the Index.

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