China A shares into MSCI benchmarks

June 29, 2017

Is inclusion into MSCI benchmarks a game changer for China A shares?  Yes and No.

The Chinese stock markets are big.  The combined market capitalization as at June 23, 2017 of the major Chinese stock exchanges in Shanghai and Shenzhen amounts to almost $7.75 trillion which compares to the New York Stock Exchange capitalization of $22 trillion, NASDAQ $9.4 trillion, Tokyo $5.4 trillion and London at $3.18 trillion.  China’s stock markets are also active with turnover on that day of $37 billion which compares with $67 billion in New York and $49 billion on Nasdaq and $6.5 billion in London.  

All of this makes it no surprise that at some point China’s domestic shares would one day be included in international benchmarks. China’s economy is the second largest in the world1; it does more trade in goods ($3.8 trillion a year) than any other country2; its market for passenger cars is nearly 25 million a year3 – GM sells 4 out of every 10 cars it produces to China4.

The notion that Chinese companies should be kept out of international benchmarks indefinitely was clearly not likely. 

What has MSCI done?
MSCI has now taken the view that Chinese stocks are important enough and that access to them has been made easy enough for ‘index-linked investment vehicles’ to include them in their index calculations from May 2018. There are however remaining difficulties that mean that there are some quite specific criteria attached.

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1 World Bank data

 2 China Customs data & Bloomberg

3 24,479,768 cars in the 12 months to May 31, 2017. China Automotive Information Net

4 Source: General Motors