By Edith Southammakosane, Multi-Asset Strategist at ETF Securities:

MSCI is due to announce its decision on the inclusion of China mainland companies in its MSCI Emerging Market benchmark at 8.30pm GMT this evening. As opposed to the past three years where market access obstacles and governance issues were the main reasons to decline A-shares application, chances for an inclusion this year are much higher and would have significant impact on the asset management industry around the world.

Many of the obstacles in the original proposal discussed three years ago have been removed from the proposal being discussed today. Concerns over repatriation limits of the money invested in A-shares have been lifted by using Stock Connect, a system that allows China-based investors to buy Hong Kong-listed shares and vice versa. The index provider also submitted a list of 169 stocks as opposed to 448 initially, bringing the weight of A-shares in the MSCI EM index, if the inclusion is approved, to 0.5% from the original 1.04%.

While the index provider already offers exposure to A-shares via other sub-indices, the inclusion in an international benchmark such as the MSCI EM index would be a precedent and would force funds around the world, that track the benchmark and its derivatives, to get exposure to Chinese domestically-listed stocks. We are talking about trillions of US dollar that can potentially flow into china mainland-listed companies as portfolio managers will have to replicate the composition of the new index at their next rebalancing period.

While the index provider plans to amend the constituents of MSCI China Index as a result of the proposal, no change for the MSCI China A Index is scheduled. The index offers exposure to 862 large and mid-cap companies listed on the Shanghai and Shenzhen exchanges. While foreign investors may be betting on A-shares stocks ahead of the announcement, less than 20% of the constituents of the MSCI China A index will be involved in the inclusion process. We believe the index may benefit from a positive outcome of today’s meeting in the short term. A-shares price-to-earnings ratio relative to H-shares shows that A-shares is currently fairly valued. A solid recovery of Chinese manufacturing PMI based on a credible reform agenda would be a stronger support for the index over the longer run.

Read the full post at ETF Securities Research Blog