The increasing availability of Chinese shares for foreign buyers has created growing problems for equity index providers. 

China is the second largest global equity market by market capitalisation, but less than 2% of Chinese listed shares are held by non-Chinese investors. This is due to how index providers have treated China.

From June 2018, MSCI will include Chinese shares in the its Emerging Markets Index and the MSCI All Cap World Index.

222 China A Large Cap stocks will be added to the index, but the 222 shares will only represent 0.73% of the Index’s value, rather than the roughly 15% that full inclusion would imply. Some form of dirty weighting will apply. MSCI will retain full discretion and there is no pre-set rollout of weighting increases.

The reform is all about shares of Chinese companies listed in China. The MSCI Emerging Markets Index already has a 28% exposure to China, but this is via shares listed in Hong Kong and the US.

Ken’s comment is to that this is symbolic move but important in significance of China going forward. Weighting will increase over time,and passive and active funds will increase, whether with A shares or others.

Action?

Buy JPM China