June 19, 2017

Possible implications of Chinese A-shares’ inclusion in the MSCI Emerging Markets Index

by Detlef Glow

On June 20, 2017, the MSCI index committee will make the decision of whether or not the Chinese onshore stock market will be included in the MSCI Emerging Markets Index. Market experts see this move by MSCI as very likely; therefore, the question arises as to what it may mean for mutual funds investing in emerging markets globally.

According to the Thomson Reuters Lipper database, all funds investing in global emerging markets hold a total of US$835 billion in assets under management. Since all of these funds do not passively follow the MSCI Emerging Markets Index, it is hard to estimate how many of these assets will be reallocated to Chinese A-shares once they are a part of the index.

Even if the funds allocate 5% of their assets to Chinese A-shares, I would expect this US$41.8 billion would have a rather small impact, given the size of the Chinese onshore market—somewhere around US$7 trillion.

That said, market participants expect the new weighting of Chinese A-shares in the MSCI Emerging Markets Index will be far below 1%, which means the amount of money flowing into Chinese equities because of its inclusion in the MSCI Emerging Markets Index will be much lower than the amount stated above.

Therefore, I do not expect a large market impact from the decision to be made by the MSCI Index committee. Nevertheless, the inclusion of China will mark a milestone for the credibility of Chinese A-shares and therefore may lead to further development of the Chinese domestic stock market, attracting new international investors and increasing the overall liquidity of the market.

The views expressed are the views of the author, not necessarily those of Thomson Reuters.

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Disclaimer: 
This material is provided for as market commentary and for educational purposes only and does not constitute investment research or advice. Thomson Reuters cannot be held responsible for any direct or incidental loss resulting from applying any of the information provided in this publication or from any other source mentioned. Please consult with a qualified professional for financial advice.

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