Ready or Not: Considering Chinese A-Shares
MSCI’s consideration of including Chinese A-shares in their broad market indexes has raised the profile of these mainland securities. While their inclusion potentially increases investment opportunities in one of the world’s largest, and most restricted, markets, it may not be as straight forward as it appears.
Historically, the Chinese equity market has been split between those shares available to foreign investors (primarily via exchanges in Hong Kong and the United States) and those shares that prohibit foreign ownership (primarily shares traded on mainland exchanges). In this article, we use the term “A-shares” to refer to shares of China-based companies that trade on the two restricted mainland exchanges, which are located in Shanghai and Shenzhen, and are quoted in renminbi. While China has implemented several programs to allow sophisticated institutions to gain access to A-shares, these programs included material size and liquidity requirements to participate, and they were generally considered flawed in terms of market access. As a result, index providers generally did not include mainland-listed shares (A-shares) in their mainstream emerging market indexes.
However, the advent of the Shanghai-Hong Kong Connect Program (Connect) provided another step forward in allowing foreigners access to mainland securities. MSCI’s recent proposal includes adding an allocation only to those securities available via these Connect programs. This move promises to open up investment opportunities, but it also requires an understanding of several unique characteristics of Chinese markets.