China equities: the opportunity just got bigger

Increased weighting of China A-shares in its MSCI EM benchmark

12 Mar 2019

MSCI announced it would gradually increase the weighting of China A-shares in its MSCI EM benchmark from 5% to 20% from May 2019. MSCI also increased the breadth of inclusion by adding mid-caps at a 20% inclusion factor starting in November 2019.

This is a positive factor which will bring in long-term reforms in the onshore market. The China opportunity just got bigger. 

A long-term positive factor for the onshore market

This move had been expected for some time now. UBS AM welcome the index inclusion news and see it as a long-term positive factor for the development of the A-share market and the ongoing integration of China into the global financial system. It confirms our long-stated view that reforms to improve access to onshore markets have been successful.

Although the implied inflows from this increased inclusion (estimated at between USD 59 billion to USD 80 billion) remain small compared to the USD 7.83 trillion capitalization of the A-share market, we believe this move is significant for two reasons:

  • It will further improve China A equities presence and acceptance on the global stage.
  • It will likely bring further reforms and improvement in corporate governance standards among the A-shares to move closer in line with global standards, which will be a long term positive factor.

These two factors mean that foreign participation in the A-share market will likely increase - continuing a trend that has picked up in the past few years and seen overseas investors become more influential.

That's a positive development because overseas investors bring different investment strategies, i.e. long-term oriented and fundamentally-driven. 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.

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