China Awaits MSCI Verdict on A-Share Inclusion

(Beijing) — Will China’s A-shares be included in MSCI Inc.’s widely traded Emerging Markets Index this year?

This will be the fourth straight year investors ask that question.

The global equities index provider had decided against it in the past three annual reviews. Limited market access for global investors, capital controls, and the opaque regulatory framework were among the main reasons for the exclusion.

But this year could be the year. MSCI’s revised inclusion criteria likely work in China’s favor, while improved access to Chinese stock markets for foreign investors and increased ease of repatriation of funds may finally win over MSCI, analysts say.

This year’s verdict will be released at 4:30 a.m. Wednesday, China time.

In the latest consultation paper released in March, MSCI said only 169 A-share companies would be considered for inclusion, down sharply from the 448 the previous year. The weighting of A-shares, if included, would drop to 0.5% from 1% in last year’s plan.

All A-shares to be included must be accessible by foreign investors via the Stock Connect program, MSCI added. The program, launched in 2014, has stock-trading links that offer mutual access for investors between the Hong Kong Stock Exchange and the mainland’s two bourses. MSCI has said these trading links pose a major “change for the investment environment.”

Gan Jie, a finance professor at Cheung Kong Graduate School of Business, believed MSCI wants to be more selective and pick companies that have reasonable standards of disclosure, are sizable enough not to fall prey to market manipulation, and are attractive to foreign funds.

Under the new plan, the offshore yuan exchange rate, not the onshore rate in previous plans, will be used for trading and settlement, according to a document provided by the MSCI. Such a move might mitigate fund-repatriation risks for foreign investors, as money invested in the Stock Connect program technically remains offshore.

China has long been lobbying MSCI to include the $1.5 trillion stock market in one of the world’s most-followed benchmark indexes.

The Emerging Markets Index consists of 23 countries, or 10% of the world’s market capitalization.

Goldman Sachs analyst Kinger Lau wrote in a report dated June 1 that nearly $210 billion worth of new funds might flock to the A-share market over the next five years should an inclusion happens.

“I think there will absolutely be inflows (to China) if MSCI changes (the composition of its) index because that creates a definition of what China is,” said Stephen Dover, managing director and chief investment officer at Templeton Emerging Markets Group, recently in Shanghai.

Contact reporter Leng Cheng (chengleng@caixin.com)