What to make of MSCI's decision on China A-shares

Chinese regulators have to approve any non-Chinese investment products, such as MSCI indexes, that include A-shares.

Asian shares climbed as Chinese companies advanced in Hong Kong and Shanghai ahead of MSCI Inc.'s decision expected Tuesday on whether to add A-shares to its global indexes, while the weaker yen supported Japanese equities.

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According to the Thomson Reuters Lipper database, all funds investing in global emerging markets hold a total of US$835 billion in assets under management.

The A-share index had been rejected three times in its bid to be included in the MSCI Emerging Market Index during the past three years. It can therefore be a first step in accessing China's onshore equity market in a reassuring and controlled manner, before moving on to bigger and better things.

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"There is a 50 percent possibility that the MSCI will include China A-shares this year as the two cross-border investment schemes have improved the accessibility of the A-share market", said Jing Ulrich, vice-chairwoman of Asia Pacific at JPMorgan Chase & Co.

As far as MSCI is concerned, they have just completed a recent round of global consultations with worldwide investors and will announce the results on 20 June.

Over the longer term, the inclusion will represent a "milestone" in China's capital market development and integration with the rest of global markets, they added. More broadly, China is set to be a key player in the global economy's shift in focus from West to East.

They got close previous year, but after a couple of big stockmarket sell offs and the involvement of the Chinese government in market support measures (some would call it market manipulation and other fears about corporate governance), MSCI said no. This is very significant for global investors, because the SZ-HK has a combined market capitalisation of $10bn, second only to the U.S. stock market. "This channel allows approved foreign funds access to A-shares but under conditions that limit their ability to repatriate their money - an issue flagged by MSCI past year when it rejected the inclusion of A shares", according to the FT. Shenzhen is home to many Chinese internet, advanced technology and software start-ups.

One of the major events of the market this week should be MSCI's decision on the potential inclusion of mainland Chinese stocks. Subsequently, we think the changes being considered by the major indices are exciting too. Market experts see this move by MSCI as very likely; therefore, the question arises as to what it may mean for mutual funds investing in emerging markets globally.

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