BOFIT Viikkokatsaus / BOFIT Weekly 2017/25

After years of discussion, MSCI Inc., which publishes a number of key global stock market indices, decided this week to include yuan-denominated A-shares listed on mainland Chinese stock markets in its MSCI Emerging Markets (EM) index. The stocks will be included in June 2018. The current plan initially would incorporate 222 large Chinese firms which A-shares can be traded through the Stock Connect programmes between Hong Kong and the Shanghai and Shenzhen exchanges, or whose H-shares are already part of MSCI EM index.

MSCI said that its decision to add mainland Chinese shares to the mix was based on the fact that institutional investors and market participants feel that access to China's stock markets has improved. The mood change, above all, reflects the launch of the Stock Connect program and the easing of pre-approval requirements in local Chinese stock exchanges. Unlike its earlier approach, MSCI's incorporation of Chinese shares into the EM index will occur incrementally, with increases in A-share weighting tied to China's progress in financial market reforms and opening up. In principle, foreign investors should enjoy increased access to markets compliant with international standards, Stock Connect programmes functionality in a range of challenging conditions, an easing of daily trading limits and improved regulation of trading suspensions.

Initially, the weight of A-shares will be just 0.7 % of the MSCI EM index. Currently Chinese shares listed on exchanges outside mainland China have a 29 % weight in the index. In terms of market capitalisation, China's stock markets are the world's second largest after the United States. Thus, in the long term, the decision to include China in the index could have large implications for capital movements.