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Monday, June 26, 2017

China stock shares join MSCI index, it is a game changer

Chinese stock market will draw huge amount of capital flows from emerging markets like India, Vietnam, etc. The effect will be far reaching.

Last week, Morgan Stanley Capital International (MSCI), a widely-tracked global index provider, said it would add China's local currency shares, referred to as China A shares, to its benchmark emerging markets index, after few years of having rejected overtures on the same.

What is MSCI?

It is the world's biggest index compiler, with more than $10 trillion in assets benchmarked to its financial products, with emerging markets alone accounting for $2 trillion.

Why is MSCI index important?

The indices are closely monitored by global investors. Inclusion in MSCI Inc.'s stock indices opens up investment interest from foreign investors in a particular country and brings a stamp of financial credibility.

What is PRC China and why haven't its shares been featured in the MSCI index so far?

It is an area under the direct jurisdiction of China and excludes special administrative regions of Hong Kong and Macau. Chinese mainland markets were not open to foreign investors (protectionism ?).

So, foreign investors hitherto had access to non-mainland shares — those that are traded in the markets of Hong Kong and Macau. These shares have been part of the MSCI Emerging Markets Index. China has been working to ease restrictions on foreign investors, influencing MSCI decision now.

What happens now?

MSCI will add 222 China A shares (blue chips) starting 2018. The stocks, which would represent a weightage of only 0.73% in the benchmark, will be included via a two-phase process in May and August next year.

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