Global equity investors can no longer leave China out of their portfolios following MSCI’s decision to include China A shares in its index, says HSBC.
MSCI's announcement yesterday that it will begin including selected China A shares in its Emerging Markets Index from June 2018 will force investors to take a position on China, says HSBC.
HSBC head of equities for Asia-Pacific Rakesh Patel said the decision to include China A shares on the MSCI Emerging Markets Index will, in the long-term, have "far-reaching implications for global equity investors".
While the initial inclusion of the largest 222 domestic Chinese companies will constitute 0.73 per cent of the index, China will eventually have a around a 15 per cent weighting in the Emerging Markets Index.
"Both passive investors, who oversee index trackers and ETFs, and active fund managers, will need to determine how to access the onshore market," Mr Patel said.
Investors will also have to decide whether they will invest via the Shanghai/Shenzhen Stock Connect or through the Qualified Foreign Institutional Investor (QFII) and the Renminbi Qualified Foreign Institutional Investor (RQFII) regimes.
"They will also need to develop a more thorough understanding of the A share market and in particular, the 222 stocks that will be included in the index," Mr Patel said.
"For global investors, the decision to be zero weighted in China, which has typically been the default position, is no longer an easy one to make. We expect initial inflows will gather momentum and grow to be substantial over time."
State Street Global Advisors head of investments for Asia-Pacific Kevin Anderson said that long-term thinking will be essential for investors – whichever pathway they choose.
"With China continuing to pursue its reform agenda, and the domestic market now too big to ignore, China’s ultimate aim of full inclusion should be the focus," Mr Anderson said.
"China A shares are estimated to grow to as much as 15 per cent of the Emerging Market Index market cap, yet the timeframe for that remains uncertain.
"Today, the first step for many emerging market investors is deciding how to use the MSCI Emerging Market Index to access this new opportunity – whether through a pooled fund or directly via Stock Connect," Mr Anderson said.