MSCI China A-Share inclusion to be long term catalyst for Chinese equity market, says expert

NEW YORK - Global index provider MSCI's full inclusion of China's A-share could take up to five years, potentially providing a sustained catalyst for the outperformance of China's mainland stock market, one expert told Xinhua Thursday.

"China is the world's second largest economy and stock market, however, China A-shares are underrepresented in global capital markets," said Brendan Ahern, chief investment officer of the Krane Funds Advisors, which is the investment manager for KraneShares ETFs (exchange-trade-fund), noting that China's capital markets are too big to ignore.

The MSCI China Index was historically limited to Chinese companies listed on the Hong Kong Stock Exchange. MSCI recently expanded its definition to include US-listed Chinese companies. However, as much as 59.2 percent China mainland A-shares haven't been included yet.

China's weighting in the MSCI ACWI Index (All Country World Index) has grown since 2000, but is still a small percentage overall.

On June 20, 2017, MSCI announced it would partially include the large cap China A-shares in the MSCI Emerging Markets Index and the MSCI ACWI Index, which is to take effect on June 1, 2018.

After the initial inclusion in 2018, China A-shares will only represent 0.73 percent in the whole Emerging Markets Index, but if the potential full inclusion is implemented, which is anticipated to be done in September 2023, the percentage will surge to 17.

"We believe China will occupy a larger portion of both the MSCI ACWI Index and investors' portfolios in general as its markets continue to open up," Ahern told Xinhua.

"Past inclusions have provided a positive catalyst for performance of local markets," he said, adding that changes to MSCI's Global Standard Index definitions can have a dramatic impact on the affected markets due to fund flows from asset managers that benchmark to MSCI indexes.

While this first inclusion is a first step, it will pave the way for further inclusions for equity markets and also for China's bond market to follow a similar path, Ahern said.