What does MSCI inclusion of Chinese A-shares mean for institutional investors?

China’s stock market took a huge step forward this month as U.S. index provider MSCI announced it would add A-shares (mainland Chinese shares) to its emerging-market index.

The presence of Chinese stocks in the key index will bring China’s traditionally closed market to investors around the world. What does the move mean for the index? And could it add unwanted risks for institutional investors accessing emerging markets through the index?

Read: The growing attraction of Chinese real estate investments

To answer the questions, Canadian Investment Review spoke to Yu Zhang, portfolio manager within the China team at Matthews Asia.

Why is this happening now?

Over the past few years, China has been making significant efforts to further open up the capital markets and we’ve witnessed the evolution of China’s A share market, not only in the number of listed companies, but also the overall quality, regulatory and corporate governance environment have been improving as well. In our opinion, China’s A-share market is simply too big to be ignored by global investors. While the inclusion provides additional positive sentiment towards the market, corporate profitability will remain a more important driver of the market than MSCI’s announcement.

Read: E-commerce among continuing investment opportunities in China

What impact will the change have on China’s stock market?

The inclusion of China’s A-shares officially puts China on the map for global investors and is regarded as a milestone for China’s equity markets with the rest of the global equity markets. Over the short term, the inclusion of A-shares at 0.73 per cent of the MSCI emerging market index, which is estimated to be an additional inflow of US$10-$11 billion against a market with daily trading volume of US$50-$60 billion, will not be impactful.

Does this make the MSCI index more risky?

There are, of course, challenges and improvements to be made so careful stock picking is particularly important. China’s A-share market is still relatively young and the overall market is currently dominated by retail investors. Trading could be volatile and government intervention can be heavy-handed. However, we are encouraged by the strong potential and opportunities in the markets and truly believe that long-term investors can benefit from having exposure into the market.

Read the full article on Benefits Canada’s companion site, Canadian Investment Review.