MSCI inclusion is long overdue

China's economy already accounts for 14.8% of global GDP (1) and the Shanghai and Shenzhen A-share exchanges are the 4th and 7th largest in the world by market cap (2).

Putting a selection of A-shares into MSCI's benchmarks makes them more representative of China and emerging markets as a whole.

Global exchanges by market cap (USD Trillions)

Source: World Federation of Exchanges, 2018

Inclusion confirms China's reform progress

More than that, MSCI's inclusion of A-shares in its indices confirms China's recent progress with economic reform. Up to now, we feel that many global investors haven't fully recognized this fact.

Now that inclusion has happened, investors will realize how far programs like the Shanghai and Shenzhen Stock Connects have gone to integrate China's onshore markets with the global financial system.

More opportunities for investors

Reforms have improved access but have also created opportunities. Now that A-shares are part of MSCI's indices, investors who follow the benchmark closely will have to allocate to the names included.

While, in a sense, that makes A-shares a mandatory investment, it also means investors - particularly passive operators - have a greater choice of names to invest in within the China equity space.

Positive, long-term impact on the market

MSCI's inclusion is a positive change for the market. As more global investors are attracted to the A-share market, different investment strategies, i.e. long-term oriented and fundamentally-driven, will become more influential and may change the structure of the market. China's A-share market is dominated by retail investors, and an influx of institutional capital may reduce volatility and make the market more fundamentally-driven.

Retail vs. institutional trading volumes on A-share markets

Source: UBS, May 2018 (3)

Likely to spur further reforms

Looking longer-term, MSCI inclusion is likely to spur further reforms. China's government is committed to further reforms, as shown by recent news on opening up the financial sector to foreign investors, increasing daily trading quotas on the Stock Connects, and potentially extending the Stock Connect program to London. As China opens further, we expect A-shares to account for a larger share of global benchmarks in the future.

Put together, MSCI's inclusion of a selection of A-shares in its benchmarks matters for a great many reasons. And, ultimately, it reinforces our view that reforms are profoundly changing China's economy and are continuing to create opportunities for investors.

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