China Shares Boosted by Index Changes

MSCI and FTSE Russell are increasing the weighting of Chinese stocks in their indices and this will have a big impact on emerging market investing

Jackie Choy, CFA 1 October, 2018 | 10:15AM

Shanghai China

Chinese shares rose last week on news that MSCI and FTSE Russell are planning to increase the weighting of China stocks in their indices in the coming years. These changes are likely to have a significant impact on emerging market investing so investors should understand the makeup of the indices that underpin ETFs and index funds to be better prepared for the changes ahead.

Index providers' definition of "China" is constantly changing. Given the often nuanced differences in index construction as well as the implementation and timing of the inclusions between FTSE Russell and MSCI, the underlying China A-shares constituents and weights could be very different.

FTSE Russell Upgrades A-Shares

Last week FTSE Russell announced it would include China A-shares in its international benchmarks by promoting China A-shares markets to "Secondary Emerging market" status from "Unclassified".

This is phase one of FTSE Russell's China A-shares inclusion, calculated using 25% of investable market capitalisation of eligible China A-shares – this compares with MSCI's current China A-shares inclusion factor of 5%. 

  • Eligible China A-shares include large-, mid- and small-cap securities from the FTSE China Stock Connect All Cap Index with around 1,250 stocks
  • Phase one inclusion will be implemented in three tranches: June 2019, September 2019 and March 2020. 

Upon completion of phase one in March 2020, China A-shares would represent around 5.5% in the FTSE Emerging Market Index, or 0.57% of the FTSE Global All Cap Index.

FTSE Russell estimates initial net passive inflows of $10 billion resulting from this inclusion.

MSCI to Quadruple A-Shares Weighting

MSCI launched a consultation on its proposal to further increase the representation of China A-shares within its global benchmark suite by:

  • increasing the weighting to 20% from 5% in two phases from May 2019
  • adding the Nasdaq-style ChiNext board as an eligible exchange segment from May 2019
  • adding China A-shares mid-caps with a 20% inclusion factor from May 2020

Following MSCI's decision in June 2017, implemented in two phases in May and August 2018, to include China A-shares in its international indices, we view the decision by FTSE to include China A-shares in its benchmarks as another step forward by international investors towards recognising China A-shares as a crucial element within the international investment opportunity set.

As with previous China A-Shares inclusions, it is crucial for investors to understand when and how the inclusions may change the composition of the ETFs and index funds that track them.

 

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author

Jackie Choy, CFA  is an ETF strategist at Morningstar, based in Hong Kong.

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