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Alternative Market Briefing

Other Voices: What is the Capital Inflow From China A-share Index Inclusion?

Wednesday, June 21, 2017

By Qi Wang, CFA, CEO at MegaTrust Investment (HK):

As expected, MSCI today announced the inclusion of China A-shares in its Emerging Markets Index for the first time. While the initial number and the starting weight of A-shares are small, the inclusion nevertheless marks the beginning of an era. The inclusion furnishes global investors with an enhanced framework to gain real China exposure and capture the Chinese equity risk premium.

One of the most common questions we get is how much foreign capital inflow there is as a result of the initial inclusion. The answer is small. Let's review the facts:

(1) Expected number of stocks to be included initially = 222

(2) Expected weight in the Emerging Markets (EM) Index = 0.7%

(3) Estimate assets tracking the EM index = USD 1.9 trillion

(4) Percent of passive investments = 15%

(5) Implementation begins in May 2018

Thus, the pure passive flow, being the money in ETFs, index funds and other index-tracking investments, is only USD 2 billion (USD 1.9 trillion x 0.7% x 15%). This is the money that must buy A-shares in order to replicate the index. Not much. In fact just a few hours of trading in the current A-share market.

In the longer term however, the total inflow could be as high as USD 680 billion, assuming full inclusion (around 20% of EM) and other index prov......................

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