Will Your ETF Soon Include Mainland China Stocks?

Next month, MSCI will reveal whether China A shares will be included in their emerging market, Asia and China indices - impacting passive and active fund investors

Emma Wall 6 May, 2016 | 1:30PM
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Emma Wall: Hello and welcome to the Morningstar Series ‘Ask The Expert’. I’m Emma Wall and I’m joined today by Jackie Choy, Director of ETF Research for Asia, Morningstar.

Hi Jackie.

Jackie Choy: Thanks for having me Emma.

Wall: So next month MSCI the indexes will be announcing whether they will be including China A shares into the MSCI Emerging Markets and MSCI China Indices. If they go ahead that will come into play in June 2017. But what will the impact be for investors.

Choy: So if that would be included China A shares would be accounting for 1% into the MSCI EM Index going forward and then like 4% in the MSCI China Index. So that would be another asset influence into the China A share market.

Wall: And of course this will effect anyone who has an ETF or tracker fund that tracks either of these indices. But it will also effect active fund managers and active fund investors. Because those fund managers will have a much bigger pool of shares from which to choose from. They will have greater exposure potentially to that market.

Choy: That’s correct, that’s why investors should watch out for that event.

Wall: Last year in June 2015, they made a decision not to include China A shares into those indices. Why did they make that decision?

Choy: So MSCI mentioned a few obstacles that they think China equity market should sort of be both into before making a decision to include them. There were three items that they talked about. Number one is the quota application process, second is the capital liquidity and the third one is the beneficial ownership. So the last 12 months the market has been seeing lot of changes in market including some of them which impact these three obstacles.

Wall: Those concerns are the things that people often talk about when investing in China. The liquidity aspect, the fact that are shareholders the priority for these companies. You say those changes have been made. So what’s the likelihood then if next month MSCI deciding to include China A shares in these indices.

Choy: Well, I can’t say whether or not they will, but let’s watch out for it. But the changes that the Chinese Government have made for example they have made QFII quotas move out. I think more quotas for the investment firms as well as reforming the actual scheme as well.

Wall: So QFII for those people who don’t know it’s this asset matching program isn’t it, which means that asset managers can invest in China as long as they have equal assets out of China that matches the amount they want to invest in China.

Choy: That’s right, in a sense yes.

Wall: So with that improved, with the market becoming more open to international investors. You think this will be a positive thing for MSCI?

Choy: That will be because this was one of the key concerns I think not just MSCI but a lot of the asset investors are actually concerned about. Whether my money can get into China market and get out of China market. Especially ETFs if you look at the redemption equation process, you need money to get in, to get out to effectively, to allow the ETF to work effectively too.

Wall: Because of course ETFs are traded on the stock exchange and they need to be liquid and they need to be tradable.

Choy: That’s right, exactly and also for the active fund managers. They need to get in and get out at the time that they want it.

Wall: So I suppose just watch this space.

Choy: That’s right.

Wall: Jackie thank you very much.

Choy: You are welcome.

Wall: This is Emma Wall for Morningstar. Thank you for watching. 

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.

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Emma Wall  is former Senior International Editor for Morningstar