Shusong Ba: Impacts of MSCI increasing China A-shares‘ weight

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Professor Shusong Ba, the Executive Director of the HSBC Financial Research Institute at Peking University, the Chief Fellow of Asian Financial Think Tank, the Chief China Economist of Hong Kong Exchanges, received interview from AFTT Monthly Questions and Answers, to interpret the impacts on the capital market of China caused by MSCI increasing the weighting of China A-shares in its indexes. Professor Shusong Ba points out that the incorporation of the A-shares into MSCI index is in itself an outcome of the continuous opening of the A-shares. From a mid and long-term perspective, increasing the weighting of the A-shares into MSCI will gradually raise the foreign capital participation in the stock market of China, further promote its integration with the global capital market and drive the structure of the A-share investors to become more diversified and internationalized. And the additional overseas funds brought by MSCI tend to focus on value-based investment, which will help gradually change the existing short-term-oriented investment behaviour characterized by radical fluctuations. 

Shusong Ba: Executive Director of the HSBC Financial Research Institute at Peking University, Chief Fellow of Asian Financial Think Tank, Chief China Economist of Hong Kong Exchanges

The incorporation of the A-shares into MSCI index is in itself an outcome of the continuous opening of the A-shares. The direct driving factor is the smooth initiation and successful operation of Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect (“Connects”), which have dispelled a series of concerns and doubts arising during the actual operations of the foreign investment in the Chinese market. Therefore, the process of attracting foreign investment into the Chinese market is in itself a process of the continuous reform and opening of the A-shares. 

At the end of 2018, the leading securities institutions on the mainland market were on the whole gloomy about the A-share market. This can be tracked clearly from the reports released by the research institutions. But, it is in such a market atmosphere that overseas investors found the investment opportunity of the Chinese market after prolonged adjustment. The net inflow of funds reflected consistently by the “Connects” became the key force in turning round the atmosphere of the A-share market of China in 2019. From a mid and long-term perspective, increasing the weighting of the A-shares into MSCI will gradually raise the foreign capital participation in the stock market of China, further promote its integration with the global capital market and drive the structure of the A-share investors to become more diversified and internationalized. The additional overseas funds brought by MSCI tend to focus on value-based investment, which will help gradually change the existing short-term-oriented investment behaviour characterized by radical fluctuations. 

Currently, China ranks the world’s No. 2 in terms of economic volume and stock market scale. However, the proportion of the A-shares in global capital (e.g. in MSCI) does not match the status. If the A-shares of China rise gradually from an inclusion factor of 5% to 100%, their proportion in the index will rise from the present 0.8% to 16.2% (including the shares of the Growth Enterprise Board), which will better reflect the position of the Chinese economy and market scale in the global financial system and contribute to advancing the internationalization of the Chinese capital market. 

The A-shares that are now included into MSCI are mostly the securities under the mechanism of the Connects, demonstrating that the mechanism has become the most convenient and effective mode in the opening of the mainland financial market and received recognition in the market. With MSCI gradually increasing the proportion of the A-shares included and the further progress of the Connects, the interaction between the mainland and Hong Kong in capital and products will get even more frequent and investors will make investment in mutual markets at a greater breadth and depth. This will further consolidate the role of Hong Kong as the gateway that links up the mainland with the international capital market. 

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Asian Financial Think Tank (hereinafter referred to as “AFTT”) is a branch of Asian Financial Cooperation Association (hereinafter referred to as“AFCA”). AFTT is comprised of 80 Chief Economists or Research Department Directors recommended by 80 AFCA member institutions in 27 countries and regions in Asia, Europe, America, Oceania and Africa. With the philosophy of "market location, global perspective, problem orientation, in-depth observation, and smart solution", AFTT is ready to develop Weekly CE (Chief Economist) View, Monthly Questions and Answers, AFTT Annual Report Asian Financial Observation and other bilingual products.

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Source: AFTT Monthly Questions and Answers No.03（Opinions in this report stand for author's personal research view only, not for opinions of any institutions）

Editor：Yuchen Huang