For many years, investment commentators have predicted that MSCI, the globally accepted benchmark by which active fund managers measure their performance against underlying equity market(s), will increase their weighting towards China A shares to reflect the growing influence and contribution of Chinese companies within the global economy.
Over the past 2 years, the ‘inclusion factor’ for China A shares in the MSCI Emerging Markets Index has increased from 0.7% to 5% which has forced foreign managers to significantly increase their China A share exposure to at least match the MSCI Benchmark. Whilst these relatively minor adjustments may not have attracted wide scale media and industry attention, the amounts involved stretch to many billions, if not trillions, of institutional fund flows, and this is one of the reasons for the strong performance of the China A share market in recent times. It is widely expected that China will become a separate asset class within the next 5 years, and the weighting of China A shares within the MSCI Emerging Markets Index will be increased to 20% (see chart below) before their inclusion in other MSCI benchmarks.
Foreign portfolio investment in Greater China is still very low relative to the benchmark (foreign investors own just 4.1% of the domestic A-share market) which suggests that a lot more foreign institutional investment will flow into China in the near future. Forward thinking long term investors will want to get ahead of this wave.