MSCI is quadrupling the weighting of domestically traded Chinese stocks in its global indexes starting this May.
In a three-step plan, the share of China A large-cap shares will increase from a 5% inclusion factor currently to a 10% inclusion factor in May, then to 15% in August and 20% in November, at which point the indexes will also add some mid-cap China A shares and Chi-Next stocks, which trade on a Nasdaq-like board at the the Shenzhen Stock Exchange.
The inclusion factor functions as a discount on how many China A shares will be included in the indexes due to limits that China imposes on foreign ownership of domestically traded stocks and MSCI’s gradual approach to inclusion.
MSCI explains on its website that international institutional investors it had consulted were leery of a weight increase beyond 20%, which would require Chinese authorities to address some “accessibility concerns,” including access to hedging and derivatives.
Once its three-step process is completed, MSCI estimates that China A shares will account for 3.3% of the MSCI Emerging Markets Index, 4% of the MSCI AC (All Country) ex Japan Index, 10.4% of the MSCI China Index and just 0.4% of the MSCI All Country World Index.
There will be 253 large-cap and 168 mid-cap China A shares, including 27 ChiNext shares in the MSCI Emerging Markets and MSCI China indexes.
“This is a long time overdue,” said Andrew Mattock, lead portfolio manager at Matthews Asia China Fund, about the MSCI announcement. “You can’t have a country account for 15% or more of world GDP make up just 1% of global portfolios. … Our hope is that this will improve people’s awareness how little they have invested in China.”