MSCI’S Landmark Move Enhances Access To Chinese Markets

The long-awaited inclusion of China A Large Cap shares to MSCI’s indexes is finally here. Gary O'Brien, Head of Custody Product, BNP Paribas Securities Services states that the big question now is whether global investors are prepared to handle the operational challenges of navigating the trading system and making the most of the rapidly growing access to China's onshore markets.

MSCI’s move on June 1 - the first of its kind - to include in its indexes China A-shares that until now traded only on local exchanges promises a new range of diversity for investor portfolios while allowing a flood of foreign funds into Chinese markets. Estimates of inflows range from an initial USD 20 billion to USD 300 billion at full inclusion^[1]. The two-step inclusion of 2.5% each will reach 5% in September 2018 to account for the existing daily trading limits on Stock Connect^[2]. When this occurs, China’s overall weight in the index could climb to 32%^[3].

The inclusion marks a big step forward in Beijing’s plans to provide greater access to Chinese markets, and follows three years of deliberations between MSCI, investors, Chinese authorities and other stakeholders. The main discussions focused on longstanding concerns about the regulatory framework of onshore markets, including issues such as volatility, uncertainty around capital repatriation and stock suspensions.

The big question now is whether global investors are prepared to handle the operational challenges of navigating the trading system and making the most of the rapidly growing access to China’s onshore markets.

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No longer a debate

There is no doubt about the growing interest for investments in onshore Chinese markets, which has only been growing in the run up to MSCI’s move. The advantages are clear-cut: greater exposure to the stocks of fast-growing domestic companies operating across a range of sectors in a massive USD 13 trillion economy^[4].

In turn, increased participation from foreign investors is expected to institutionalise the domestic market and create fresh opportunities for investments, particularly as the Chinese government encourages more state-owned companies to list their shares. The participation of international institutional investors should foster a more robust capital-raising mechanism and ensure the long-term sustainability of the country’s stock markets.

Meanwhile, long-existing QFII/RQFII schemes and Stock Connect have so far led the way in improving access to and internationalising China’s markets. By March-end, Stock Connect northbound assets under custody stood at RMB 560 billion, and this is expected to increase to over RMB 600 billion after MSCI’s inclusion is complete later this year.

The conversation shifts

As investors become convinced of the merits of the inclusion, the discussion is now focused on how best to capitalise on MSCI’s move, as well as other current and future market access schemes. Issues such as the creation of an operational framework facilitating the easy trading, clearing and settlement of these shares are now occupying the attention of investors, and rightly so.

For instance, most foreign investors, especially passive ones, will initially access China A-shares through the Stock Connect scheme instead of QFII or RQFII, mainly because of quota limitations in the latter schemes and the need to be better versed in local Chinese market regulations, both of which can cause delay.

Read the full article here: https://securities.bnpparibas.com/files/live/sites/web/files/medias/documents/thoughtleadership/art_msci_china_2018-06-28.pdf

^[1] What is China's A-share MSCI inclusion?

^[2] China a shares inclusion

^[3] Wei, Zhen. MSCI. MSCI on China, April 2018, p.3.

^[4] Economic Watch: Softer but better growth expected for Chinese economy in 2018