BOFIT Viikkokatsaus / BOFIT Weekly Review 2018/22

Starting today (June 1), share index producer MSCI includes some 233 A-shares listed on mainland Chinese exchanges in its international indices. The decision was taken last summer. Only 5 % of the adjusted market capitalisation of the Chinese shares are included, indicating the large remaining barriers to market access and market-based trading on Chinese exchanges. The index update will take place in two phases. Half of the Chinese share weighting will be included now and the other half at the beginning of September. For example, after the update, the MSCI Emerging Market index's 31 % China weighting still only contains 0.8 percentage points from mainland China A-shares. The weighting of Chinese A-shares in the MSCI All Country World Index will only be about 0.1 %.

Mainland China's stock markets are the world's second largest after the United States. International indices have traditionally taken their China weighting from shares listed in Hong Kong and outside mainland China. Foreign holding of Chinese shares concentrates on these shares. China's stock markets differ from Western stock markets in their lack of institutional investors. Furthermore, the state is heavily involved and intervenes actively in trading. MSCI has warned of the risks associated with Chinese markets such as the volatility caused by the market structure and poor social, environmental and corporate governance.

Thus, the inclusion of Chinese A-shares in international indices is largely a symbolic gesture, an expression of Western hopes that China will continue to open up its markets to the world and adopt market-based reforms. Several observers say that it is unlikely that the index update will immediately significantly increase capital inflows from abroad. Foreign shareholding under the joint Stock Connect programmes of the Hong Kong stock exchange and the Shanghai and Shenzhen bourses is currently about $73 billion. All in all, foreign ownership in China's stock markets is about $190 billion, or 2 % of the total market capitalisation.

China is updating its rules on trading in China depositary receipts (CDR) in mainland China, which would give large foreign listed Chinese firms the possibility to issue such certificates also on domestic markets. The issuance of CDRs would help to facilitate the planned cooperation between the Shanghai and London exchanges. Central bank governor Yi Gang said in April that trading under the cooperation programme could begin already this year.

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