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 three 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 products, with emerging markets alone accounting for $2 trillion.
Why are MSCI indices important?
The indices are closely tracked 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 mainland 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.
So, foreign investors hitherto had access to non-mainland shares — those that are traded in the markets of Hong Kong and Macau. The non-mainland shares have been part of the MSCI Emerging Markets Index. China has been working to ease restrictions on foreign investors, influencing MSCI’s decision now.
What happens now?
MSCI will add 222 China A shares (shares of large enterprises) starting next year. 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.
How will this affect India?
Most experts see only minimal impact on the Indian market in terms of outflows. However, MSCI has said it is open to adding more China A shares, provided it opens up its equity market further. If China continues to gain more weightage on the index, more money could well flow out of India.
