What happens when MSCI takes China A-shares

MSCI recently chose to not include China’s A-shares in its emerging markets index for the time being. But the US index provider did say that if China resolves a number of market accessibility issues it would reconsider adding the shares to its benchmark.

The A-shares are traded only on the mainland, listed in Shanghai and Shenzhen and denominated in yuan.

However, one thing that’s been little talked about is how adding the mainland shares will dramatically alter China’s weighting in the benchmark index and thus, all the other countries. According to Reuters, China will jump from its current 25.3% weighting to 43.6%.

Not only is it nearly double, but China would make up nearly half the entire index. This could have a significant affect on global investors looking for more diversification. On a combined market capitalization basis, the new Chinese securities additions together would total some $1.53 trillion, the biggest of any one region, based on the current securities in the MSCI China A International Index and MSCI Overseas China Index, according to Reuters.

Country Current Weightings in MSCI Emerging Mkt. Index Weightings After A-Shares Added
China 25.3% 43.6%
South Korea 14.3% 11.7%
Taiwan 12.5% 10.0%
South Africa 7.3% 5.5%
Brazil 7.3% 5.5%
India 7% 5.2%
Russia 3.9% 3%
Others 28.7% 15.5%
Source: MSCI, Reuters, WSJ, numbers are approxmiations25253

Not only will adding the stocks force money managers to buy the new shares, it will dramatically alter the index’s returns.

The MSCI EM Index fell 2.6% for the year ending May 31, but that’s a bit deceptive. While the rest of the emerging markets were dismal, with Brazil off 31% and  Russia down 25%, China’s 32% gain helped temper the losses.

Had the A-shares been included over the past year, a period during which they surged 128%, outperforming every other county in the index, their excessive weight would have pushed up the index quite a bit. However, that leads to the worry that with China making up nearly half the index, will this even be representative of the emerging markets?



Categories: Asia Unhedged

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