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Inclusion of A shares in global index boosts liquidity
By Lan Shan, Li Lin, Sameer Goel, Mallika Sachdeva and Audrey Shi |
June 20, 2013, Thursday
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Print Edition
Print Edition
MSCI has recently announced that it will include China A shares in the review list for potential inclusion to its most tracked global benchmarks such as the Emerging Markets index. These global indices currently include only some of the Chinese corporate shares listed overseas and B-shares listed in China.
MSCI will announce its decision in June 2014. If MSCI decides to include China A shares (likely in a phased approach), the first change could be implemented as early as May 2015.
We see the inclusion of China A shares as a milestone in the indexing world with significant and long term impacts.
Currently major global benchmarks do not represent well China's stock market. The Chinese domestic equity market is the third largest in the world by total market capitalization (China is the second largest if including the shares listed overseas). However, China remains underrepresented among global investors' portfolios, mostly due to the foreign investment restrictions of A share market.
In addition, current global benchmarks do not have a good representation of the sector composition shown in the A share market.
Although demographic conditions weigh on China's long term growth, structural factors, such as consumption expansion and urbanization, will provide support to the economy in the long term. We forecast a medium-term economic rebound in next several quarters, followed by the declining long-term trend of GDP growth to a level around 6.8 percent in the year of 2020. China's growth will remain relatively high in the long term. Currently the A share market has priced in too much pessimistic sentiment and does not reflect China's relatively better future growth and improving corporate profitability conditions.
Potential re-rating of the market and improving earnings suggest that China's equity market has long-term upside potential.
The pace of the capital market liberalization in China has been accelerating. We expect the foreign holdings of A shares as percentage of total A share market cap to reach 4 percent in 2016, from the current 1.5 percent. We are optimistic that over the next 2-3 years the China A shares will be included (at least partially) in one or more major global benchmarks.
Assuming a full inclusion of China A shares, China's weight could increase from 18 percent in the MSCI EM to almost 30 percent. Based on the estimated assets benchmarked to major global indices (assuming these assets will be allocated according to the country weight in the indices), China could witness inflows of over US$180 billion.
In the medium to long term, Chinese equity market has plenty of room to grow, which could potentially attract US$500 billion to US$1,500 billion worth of inflows. In addition, the A-share market will attract increased long term investor interest and have improved market liquidity and stability.
MSCI will announce its decision in June 2014. If MSCI decides to include China A shares (likely in a phased approach), the first change could be implemented as early as May 2015.
We see the inclusion of China A shares as a milestone in the indexing world with significant and long term impacts.
Currently major global benchmarks do not represent well China's stock market. The Chinese domestic equity market is the third largest in the world by total market capitalization (China is the second largest if including the shares listed overseas). However, China remains underrepresented among global investors' portfolios, mostly due to the foreign investment restrictions of A share market.
In addition, current global benchmarks do not have a good representation of the sector composition shown in the A share market.
Although demographic conditions weigh on China's long term growth, structural factors, such as consumption expansion and urbanization, will provide support to the economy in the long term. We forecast a medium-term economic rebound in next several quarters, followed by the declining long-term trend of GDP growth to a level around 6.8 percent in the year of 2020. China's growth will remain relatively high in the long term. Currently the A share market has priced in too much pessimistic sentiment and does not reflect China's relatively better future growth and improving corporate profitability conditions.
Potential re-rating of the market and improving earnings suggest that China's equity market has long-term upside potential.
The pace of the capital market liberalization in China has been accelerating. We expect the foreign holdings of A shares as percentage of total A share market cap to reach 4 percent in 2016, from the current 1.5 percent. We are optimistic that over the next 2-3 years the China A shares will be included (at least partially) in one or more major global benchmarks.
Assuming a full inclusion of China A shares, China's weight could increase from 18 percent in the MSCI EM to almost 30 percent. Based on the estimated assets benchmarked to major global indices (assuming these assets will be allocated according to the country weight in the indices), China could witness inflows of over US$180 billion.
In the medium to long term, Chinese equity market has plenty of room to grow, which could potentially attract US$500 billion to US$1,500 billion worth of inflows. In addition, the A-share market will attract increased long term investor interest and have improved market liquidity and stability.
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