MSCI issued the new proposals on 24 March for consultation with the investment community in the run-up to the index provider’s annual decision on including so called China A-shares expected in June.
The decision to include some of the more liquid A-shares would affect MSCI’s widely-tracked Emerging Markets Index, its benchmark MSCI All Country World Index (ACWI), and the MSCI China and Asia ex-Japan indexes.
The proposals reduce the number of A-shares that would be included in the key indexes to 169, compared with 448 under last year’s suggested framework, wqhich was ultimately rejected.
A-shares under the new proposal would account for 1.8% of the weight of the index, compared to 3.7% under the previous proposal.
The proposed new framework will limit the equity universe to large cap companies accessible through the Shanghai-Shenzhen-Hong Kong Stock Connect program.
It also excludes A-shares of companies that have H-share listings included in the MSCI China Index. (H-shares are shares of mainland companies listed in Hong Kong.)
Obstacles addressed
These measures address the issue of the QFII and RQFII limitations on monthly repatriation of assets, which MSCI cited as one of the main reasons not to include China A-shares in June 2016.
“The new proposal addresses two of the three obstacles that MSCI cited last year,” said Jackie Choy, director of ETF research for Asia at Morningstar.
“On the other hand, limiting the China A-share universe to large caps “is not a good representation of China’s overall equity market,” he added.
The proposal’s focus on the Stock Connect system, making it easier for managers of index-tracking products to access Chinese securities, bypasses the cumbersome alternative of the QFII and RQFII schemes.
Ineligible securities
The new framework also makes securities suspended for more than 50 days in the past 12 months ineligible for inclusion. Voluntary trading suspensions have been plaguing Chinese stock market since the crash in the summer of 2015, making life difficult for index providers and managers of index-tracking products.
In order to harmonise with Stock Connect processes, index changes linked to corporate events or quarterly index reviews would be postponed to the next day if the trigger event takes place on a holiday or if the daily trading limits of the scheme are breached.
For the same reason IPOs would not be included in the indexes, as the users of Stock Connect don’t have access to them.
In order to minimise the potential tracking errors resulting from divergence of onshore and offshore renminbi exchange rate, the new proposal stipulates the use of the offshore CNH rate for index calculation, not the onshore CNY rate as before.
MSCI said its intention is still to include A-shares in steps.
If accepted MSCI’s proposal would see China A-shares constitute 0.1% of MSCI All Countries World Index, whereas Chinese companies today account for 3.1%; 0.5% of Emerging Markets (Chinese companies: 28.1%) and 0.6% of Asia Ex-Japan indices (Chinese companies: 33.1%).
| Original Proposal | New Proposal |
| Based on QFII/RQFII access | Based on access via Stock Connect |
| Large, mid and small caps inlcuded (est. 448 listings) | Includes only large caps accessible via Stock Connect (est. 165 listings) |
| Include A-shares of companies with H-share listings | Exclude A-shares of companies if their H-shares are included |
| Shares suspended more than 50 days are removed. | In addition: securities with a record of long trade suspensions are not eligible |
| Index changes implemented when triggered, with no regard to Stock Connect | Implementation of index changes takes into account Stock Connect calendar and market closures due to breach of daily limits |
| Onshore CNY rate used | Offshore CNH rate used |
