Morgan Stanley Capital International, more well known as MSCI, announced on Tuesday, June 9th that it anticipates including China A shares in its emerging markets index in the future assuming a number of issues can be resolved. MSCI also noted it might announce its decision on including China in the index outside of its usual annual review period in June.

China May Join MSCI Emerging Markets Index Soon

The key issues still to be resolved before inclusion in the MSCI Emerging Markets Index include the quota allocation process, capital mobility restrictions and beneficial ownership of investments.

Of note, the MSCI Emerging Markets Index has a 26% allocation to China right now, but it is almost all Chinese stocks listed in Hong Kong (H shares).

More on plans for MSCI Emerging Markets Index to include China

For the last couple of years MSCI has held off on including mainland Chinese stocks in its emerging market index because of restrictions on foreign investments. Over the last year, China has taken quite a few steps in liberalizing its capital markets, such as the Shanghai-Hong Kong Stock Connect providing foreign investors access to A shares via the Hong Kong stock exchange.

However, a decision to include A-shares in the index would not lead to their addition to the emerging market index until 2016. It looks like inclusion of China A shares will increase the index’s overall exposure to China to a solid 37.5%.

In making its decision, MSCI undertook extensive discussions with pension plans, asset managers and even brokers. Some were less than sanguine about adding China A-shares today, pointing to limits on the amount of investments foreigners are allowed in the A-share market, as well as other irregularities regarding  settlement and custody via the new trading link with Hong Kong.

One major issue still to be resolved is limited foreign access to the Shenzhen stock market, which lists over 1,600 firms. Foreign investors cannot access the Shenzhen market except via a quota, as Chinese authorities have not created a similar link between Shenzhen and Hong Kong as they did with Shanghai.

Statement from MSCI managing director

“Substantial progress has been made toward the opening of the Chinese equity market to institutional investors,” commented Remy Briand, MSCI managing director and global head of research in a statement. “In our 2015 consultation, we learned that major investors around the world are eager for further liberalization of the China A-shares market.”