The Shanghai composite has risen just over 1 percent so far this year, in contrast with 18 percent gains for the iShares Emerging Markets ETF (EEM) and a 9 percent rise for the S&P 500. A share U.S. ETFs such as Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (ASHR) and KraneShares Bosera MSCI China A ETF (KBA) climbed more than 1.5 percent in extended-hours trade.
“We believe our clients will benefit from today’s decision to bring Chinese equities into mainstream investment. BlackRock has continued to support all opening of investment in China’s onshore capital markets for a number of years,” Ryan Stork, BlackRock chairman, Asia Pacific, said in a statement.
China already has the largest weighting in MSCI’s Emerging Markets Index at nearly 30 percent, but the index only includes Hong Kong and U.S.- traded shares of Chinese companies. For the last three years, the index giant had decided against adding the mainland traded stocks.
MSCI plans to add the A shares in a two-step process next year, following reviews in May and August 2018. That’s partly due to trade limits under the stock connect program that links Hong Kong’s stock market with that of Shanghai and Shenzhen, Chia said. The development of the connect program was a major factor in MSCI’s decision Tuesday, MSCI representatives said.
“We are very hopeful … Chinese authorities will continue with the momentum” in opening up Chinese markets to foreigners, Sebastien Lieblich, global head of index management research at MSCI, said on the press call.
If China improves the ability of foreigners to access its markets, mid-cap mainland Chinese stocks could also be added to the emerging markets index, Lieblich said. In that case, mainland China would have a 1.4 percent weighting in the index overall, and he estimated inflows could roughly double to $30 billion to $35 billion.
That said, MSCI noted in the release that trade suspensions in some A shares and restrictions on creating related investment products remain issues China needs to resolve.
There is “constructive and cordial collaboration between MSCI and the Chinese regulator,” Lieblich said, noting that the index giant doesn’t dictate market changes. “What we are doing is providing feedback from international investors to them.”
MSCI on Tuesday also decided not to add Argentina’s stocks to the emerging markets index, while saying that country’s stocks and Saudi Arabia’s stocks would be part of next year’s review for inclusion.
Lieblich said on the press call that the oil producing nation’s highly anticipated Saudi Aramco initial public offering “will have absolutely no bearing on our decision to include the Saudi Arabia index into the EM index.”