MSCI may include China A-shares in emerging markets index

Shanghai-Hong Kong stock connect to be catalyst for A-share inclusion in MSCI index

The Shanghai-Hong Kong stock connect could create the conditions for MSCI to include China A-shares in its suite of global indexes such as its emerging markets index, according to the head of research at MSCI.

Global institutional investors that benchmark to MSCI's group of indexes have long been trying to gain access to China's onshore A-shares market, which has so far been restricted to those who hold quotas, with mainland authorities gradually increasing the quota size under the qualified foreign institutional investor (QFII) and renminbi QFII schemes.

MSCI has so far excluded A-shares from its global indexes yet the tie-up between the Hong Kong and Shanghai stock exchanges which will ease access to China's A-shares index may loosen the barriers to entry into the MSCI EM index, said Chin Ping Chia, managing director and head of Asia-Pacific research at MSCI, speaking at the Asia Risk Congress in Hong Kong on October 30.

"We went through a fairly extensive consultation on the potential inclusion of A-shares into the MSCI EM index and at the time that was without the [Shanghai-HK] connect.

"We know well how investors see the current structure of QFII and RQFII so there is still room for improvement before we put them on the global mainstream index. Looking at the connect itself, by design it does address some of the issues that we talk about such as the distribution of order and capital mobility which in the context of the connect is less of a problem," he said.

Looking at the connect itself, by design it does address some of the issues

Progress has been made over the past 12 months, including an expansion of the RQFII programme to London and Singapore and a doubling of the RQFII and QFII quotas which now stand at more than $200 billion. Despite the developments, however, following an industry consultation earlier this year, MSCI declined to include Chinese mainland equities into its global indexes citing concerns about China's strict quota limits and its tax regime. For the China component of its EM index MSCI currently uses H-shares, Hong Kong listed shares of Chinese companies.

Speaking during a panel discussion, Chin reiterated that challenges remained but said the decision would be reviewed once the mutual market access scheme – which was due to launch on October 27 but has been indefinitely delayed – is off the ground.

"The stock connect isn't a perfect system, it's a pilot system and has a limited opportunity set today. It represents a fraction of the market so in itself that means it's a long-only channel to access the market. We have to go through the same process: wait for investors to start trading it and then ask, 'are you happy with the connect and is it a perfect system for you?' Then we can make an official decision about whether to include A-shares," Chin said.