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MSCI versus Goldman: A-Shares ETFs in Focus

Zacks Equity Research

Pouring cold water on high hopes,MSCI Inc. MSCI, the key provider of global equity indexes, announced that it would hold the addition of Chinese A shares in its emerging market index due to persistent concerns pertaining to the Chinese economy and lack of accessibility.

This is not the first time that MSCI has rejected A-Shares. Last year the index provider had done the same. MSCI surprised the market before when it denied the entry of China A-shares to its emerging market index in 2015 and 2014 (read: Emerging Market ETFs in Focus on MSCI Index Review).

What Are A–Shares?

Investors should note that A Shares are defined as the common stocks issued by companies based in mainland China and are traded in renminbi (‘‘RMB’’) on the Shenzhen or Shanghai Stock Exchanges. 

Initially, the China A-Shares market was not allowed to many foreign investors, but it is slowly beginning to open up. The launch of the Shanghai-Hong Kong Stock Connect program, which allows direct trading of Shanghai shares by investors outside mainland China, boosted the appeal for China-A shares in recent times.

What Keeps MSCI from Including A-Shares?

MSCI intends to see more accessibilityof the China A shares market before the inclusion. MSCI said"in keeping with its standard practice, MSCI will monitor the implementation of the recently announced policy changes and will seek feedback from market participants."

The index provider also indicated that investors need to judge the efficacy of the Qualified Foreign Institutional Investor program (QFII) investment quota allocation, ‘capital mobility policy changes and the effectiveness of the new trading suspension policies’, as noted by CNBC. 

In 2015, issues overthe allocation of investing quotas for large investors and limits in capital mobility led MSCI to not add A-Shares. Prior to that, MSCI found the quota was too limited to deserve an insertion into the conventional index.

Is There Hope?

However, MSCI also noted that it will continue monitoring China A-shares market and keep them on hold for consideration in the 2017 review. Moreover, it gave hints of the possible off-cycle inclusion if major positive developments happen before June 2017, per CNBC.

Goldman Sounds Relatively Bullish on A-Shares

First of all, Goldman Sachs upped its estimated probability for MSCI inclusion from 50% to 70% a few days back, as per barrons.com. Also, Goldman is hopeful of the launch of a new stock trading link between Hong Kong and Shenzhen as soon as in 4Q16. Goldman even believes that a ‘special review’ is possible before June 2017. However, Goldman agreed that there are issues raised by MSCI yet to be sorted out at the Chinese regulators’ end (read: China ETF Investing: Will it Buoy up or Dip Down in 2016?).

HSBC also calls the MSCI decision a ‘negative surprise’. Citigroup had projected a 51% chance of A-Shares getting a nod from MSCI and finally was caught off guard. And BlackRock Inc. has brought about its first U.S.-listed exchange-traded fund to offer investors exposure to A shares, just a day after MSCI put it down.

Market Impact

According to investors, now that MSCI has rejected A-Shares, the Chinese government would act fast to get the eligibility next time. So, shrugging off initial jerks received by the MSCI, A-Shares recovered on hopes that whatever loopholes there are in A-Shares market now, will be fixed soon to get an elite status.

A-Shares ETFs in Focus

Foreign investors can access this market through the ETF form. Deutsche X-trackers Harvest CSI 500 China-A Shares Small Cap ETFASHS, VanEck Vectors ChinaAMC SME-ChiNext ETF CNXT, Deutsche X-trackers Harvest CSI 300 China A-Shares ETF ASHR and VanEck Vectors ChinaAMC CSI 300 ETF PEK are some of the A-shares ETFs that scored gains in the last two trading sessions (as of June 15, 2016).  ASHS, CNXT, ASHR and PEK added about 3.4%, 3.3%, 1.54% and 1.3% in the last two trading sessions (as of June 15, 2016) (see all Asia-Pacific (Emerging) ETFshere).

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DEUTS-XT HV CS3 (ASHR): ETF Research Reports
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