MSCI finally agreed to include mainland's A-shares into its Emerging Market equity index - BBH

It took a few years, but MSCI finally agreed that China had taken sufficient measures to begin including the mainland's A-shares its Emerging Market equity index, explains the analysis team at BBH.

Key Quotes

“It will take place in two steps next year, in May and August.  In weighting terms, the A-shares will account for 0.5% of the Emerging Market equity index.  MSCI met China halfway, so to speak.  China has made several reforms to meet MSCI requirements.  MSCI scaled back its proposal and won support by some of the largest asset managers in the world.”

“It is an important first step.  Over time, this allocation is likely to increase, though at some point it could come at the expense of the other Chinese shares are already included, like H-shares and ADRs.  At the same time, the impact should not be exaggerated.  The allocation is small enough.  Some fund managers may choose to ignore it for the time being, instead buying a proxy in the H-shares, which have outperformed the A-shares by more than 10 percentage points so far this year.”

“Bloomberg is overplaying the news by asserting that it advances President Xi ambition of making the yuan a global currency.  Some estimates suggest the 0.5% allocation to A-shares is worth $8-$10 bln of inflows.  Given the size of the currency market and the average daily yuan flow, it is the minor sum, which also is unlikely to have much impact on the prices of local shares.”

“At the end of the month, the IMF's COFER report will show the currency allocation of reserves as of the end of Q1.  Recall that at the end of 2016, the IMF estimated that the dollar value of the yuan in reserves was a little less than $85 bln.  From another perspective, China is already a global currency.  It is in the SDR.  The yuan's turnover means that it has surpassed the Mexican peso as the most actively traded emerging market currency.”

“Separately, MSCI postponed decisions on whether to lift Argentina from Frontier to the Emerging Market Index.  It appears that the decision will be reconsidered next year.  MSCI also postponed a decision for a stand alone Nigeria equity index until November.  Saudi Arabia was put on a watch list for potential inclusion in the Emerging Market Index.  MSCI noted that Saudi Arabia had taken significant strides to improve accessibility.”

“Chinese shares did edge higher, with the Shanghai Composite gaining 0.5% and the Shenzhen Composite rising 0.4%.  Hong Kong's Hang Seng and an index of China's H-shares were lower.   It is not clear how much of the gain in China's shares can be attributed to the MSCI decision.  The PBOC is continuing to inject liquidity into the banking system, apparently to relieve quarter end pressures and that Shanghai Interbank Offered Rate eased for the fifth day.”