MSCI Dips Toe into China A-share Pool

June 07, 2018 | David Hernandez, CFA, Director of Traditional Manager Search

On May 31, 2018 MSCI decided to add 226 China large-cap A shares to the MSCI Emerging Markets (EM) Index. What is an A share? They are shares of Chinese companies that trade on local Chinese stock exchanges. Historically, foreign investors have had limited — if not zero — access to these markets. Three years ago, China launched its Stock Connect program, improving the accessibility to A shares and prompting their inclusion in the broad EM index. If A shares were just recently added, what constitutes the current 30.5% exposure to China? The China portion of the index is mainly comprised of the following:

• H Shares – Chinese companies incorporated in China and listed on the Hong Kong stock exchange.
• Red and P Chip – Chinese companies incorporated outside of China and listed on the Hong Kong stock exchange.
• Overseas – Chinese companies listed on an overseas exchange, for example Alibaba which is listed in the NYSE.

By September 2018 China A-shares will constitute 0.8% of the index. This exposure represents a 5% inclusion rate of the A Share market and is tiny compared to the 16.2% exposure if MSCI used a 100% inclusion rate. While currently small, investors should expect A shares to become a larger portion of the index over the coming years, increasing the EM opportunity set.

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