MSCI announced its decision to include shares of 222 large cap China A-share companies in its benchmark Emerging Markets Index on Tuesday.
What does the decision mean?
It means that China’s A shares – that are shares of mainland China-based companies listed in Chinese markets, that were previously not accessible to foreign investors for investments, will now be open to overseas investments.
After denying inclusion 3 times in the past, what led to MSCI’s positive decision this time?
MSCI in the past mentioned that China’s restrictive capital and financial market governance policies were raising liquidity risks concerns for investors subscribing to the MSCI EM index. China has since then introduced reforms to improve accessibility to its domestic shares (Stock Connect Program) and relaxed governance norms.
The 222 A shares will for now account for only ~0.7% of the Index in terms of market capitalization.Nevertheless, it opens China’s domestic financial markets to capital flows from foreign investors, allowing them to partake in China’s growth story. Investors in the MSCI EM index will now gain exposure to 222 large cap China A-share companies besides having direct access to Chinese stocks through the Stock Connect program. According to estimates, it would lead to potential inflows of ~18bn to China’s stock markets. This would help boost prices of A-shares and A-shares related ETFs. The positive sentiment may also support CNY in the short term.
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