China may be run by the Communist Party, but say what you will about its politics, this country is now in the capitalist big leagues. MSCI gave its mainland stocks, known as the A-shares, its blessing after market hours on Tuesday. That means that some companies listed on the Shanghai and Shenzhen exchanges will be included in the widely traded MSCI Emerging Markets Index. Any fund that tracks that index will be required to allocate a portion of their fund’s capital to mainland Chinese stocks.
Earlier this month, Brendan Ahern, CIO of Krane Shares, a China specialty ETF shop in New York, predicted here on FORBES that MSCI would include the A-shares in the index on Tuesday.
Ahern was in China last week, scouring for sentiment on inclusion. “The mood was muted after last year’s disappointment,” he says. Chinese investors have been banking on MSCI to give Shanghai and Shenzhen the greenlight since 2015. The market rose over 45% from January to June back then. It collapsed when MSCI said no. Domestic investors gave up. MSCI rejected on various technicalities last year, too. Not only did China not go in but Pakistan, of all places — a frontier market — managed to squeeze in.
The more sophisticated Hong Kong-based investors had higher expectations this year, however. Those contacts helped Ahern see inclusion as more likely than not. “Hong Kong institutional brokers and investors have familiarized themselves with Connect trading,” he says of the roughly two year old system that allows Hong Kong brokers direct access to A-shares on their trading terminals. “They see how easy it is to use, so that eliminates why MSCI wouldn’t include in their view,” he says.
They were right.
It was that successful merging of the Shanghai-Hong Kong and Shenzhen-Hong Kong Stock exchanges that ultimately paved the way for MSCI to pull the trigger. It is also a sign that China’s one-party government remains committed to opening its markets. Quite frankly, this creates a myriad of opportunities for investors and investment banks who will need to expand their research to include the equities included in the index.