Key decision means Chinese companies could join emerging market index

A decision to include China's A-share companies in the MSCI Emerging Market Index could finally happen later this year.

Plans have been shelved three times to include China's A-share index in the EMI, which is compiled by Morgan Stanley Capital International, or MSCI.

In this latest move, only 169 China-listed stocks will be considered for the MSCI, which is down from the 448 listed companies under the previous proposal.

Talks between the EMI and China's A-share index centered on this pared down solution, according to the MSCI's consultation document published on its website in March.

Still, all the 169 mainland companies can be currently accessed by foreign investors on the Shanghai-Hong Kong Stock Connect and the Shenzhen-Hong Kong Stock Connect.

"There is a 50 percent possibility that the MSCI will include China A-shares this year as the two cross-border investment schemes have improved the accessibility of the A-share market," said Jing Ulrich, vice-chairwoman of Asia Pacific at JPMorgan Chase & Co.

"We expect the Chinese government to continue to open up the financial markets gradually," Ulrich added.

The A-share index had been rejected three times in its bid to be included in the MSCI Emerging Market Index during the past three years.

In 2016, MSCI cited restrictions on foreign investment flows in the mainland market, trading suspensions of Chinese-listed companies and pre-approval requirements as the three main hurdles.

If a deal is finally hammered out, A-shares would account for just 0.5 percent of the MSCI Emerging Markets Index. And they would probably be included in the EMI next year.

By opening up the mainland market through the Shanghai-Hong Kong Stock Connect in 2014 and the Shenzhen-Hong Kong Stock Connect last year, the central government has gradually eased capital restrictions and investment quotas.

Also, by focusing on large-capitalization stocks, the problems arising from share trading suspension are to a large extent resolved.

The only obstacle to overcome is the pre-approval requirement. Discussions are still being held in an effort to solve this problem.

Even so, China's A-share index will be small compared to the overall MSCI Emerging Market Index.

"With $1.6 trillion worth of assets under management in the MSCI Emerging Market Index, the 0.5 percent weight will bring only $8 billion of inflows to A-shares," said Aidan Yao, senior emerging Asia economist at AXA Investment Managers.

"This represents 0.8 percent of A-shares' free-float market capitalization and 2.6 percent of its daily trading turnover," he added.

But global fund managers stressed that investing in the A-share market will pay off in the long term.

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