(Adds background, investor quotes)
By Carolyn Cohn and Natsuko Waki
LONDON, March 12 Index compiler MSCI plans to
include China's mainland-based A shares in its benchmark
emerging market index from May 2015, as the country gradually
opens up its domestic yuan markets to foreign investors.
MSCI has started consultations with investors and will make
a final decision in June, the firm said in a consultation
China, the world's largest emerging market, is already the
biggest component of the MSCI emerging market index,
benchmarked by more than $1.3 trillion of global assets under
Its part of the index is currently taken up by shares listed
in Hong Kong, or listed in China but denominated in U.S. or Hong
But the country has been allowing foreign investors access
to its yuan-denominated domestic share base, listed on the
Shanghai and Shenzhen exchanges, in recent years through a quota
system. Expansion of the quota system has accelerated in recent
months, as China looks to liberalise its markets.
"There are over 300 (foreign) investors who already have
exposure to A shares," said Chin Ping Chia, head of index
research in Asia for MSCI, adding that this group of investors
would like to benchmark their performance against an index that
includes the asset class.
"Because A shares are not in the benchmark, it creates a
benchmark misfit issue."
The inclusion of the Chinese A shares is planned in steps,
starting from May 2015 with a small 5 percent of the A shares'
This would bring China's weighting in the emerging market
index to 19.9 percent from the current 18.9 percent.
When China fully liberalises its capital markets, the
country's weighting could potentially rise to as high as 27.7
percent, MSCI said.
The move by MSCI makes sense as China aims to eventually
make its currency fully convertible and allow greater foreign
investment, investors said.
"It's well in line with the roadmap of liberalising the
Chinese financial markets," said Karine Hirn, head of Asia at
East Capital in Hong Kong.
"It's potentially very good news for the Chinese market but
less so for another emerging market whose weight will have to
The increased weighting for China may disturb investors
unwilling to ramp up their exposure to the world's second
largest economy, whose stock markets have consistently
underperformed in comparison with the country's growth
Corporate governance issues have often been blamed for
Chinese stocks' poor performance, with the country's shadow
banking sector currently coming under scrutiny.
"It's probably valid (to include A-shares) but these are
based on a relatively narrow set of criteria and do not reflect
real world risk for investors, which is governance at sovereign
as well as corporate level," said John-Paul Smith, head of
emerging equity strategy at Deutsche Bank.
(Additional reporting by Sujata Rao; Editing by Toby Chopra)