CONSULTATION ON
FURTHER WEIGHT INCREASE OF
CHINA A SHARES IN THE MSCIINDEXES
December 2018
This consultation may or may not lead to the implementation of any or all of the proposed changes in MSCI’s
indexes. Consultation feedback will remain confidential. MSCI may publicly disclose feedback if so requested by theprovider of the feedback. In that case, the relevant feedback would be published together with the final results ofthe consultation.

© 2018 MSCI Inc. All rights reserved.
Please refer to the disclaimer at the end of this document.

INTRODUCTION• The 5% initial inclusion of China A shares was successfully implemented in May andAugust 2018 with overwhelming positive feedback from market participants• MSCI is now launching this consultation on a further weight increase of China A shares in
the MSCI Indexes• MSCI welcomes feedback from the investment community on the proposal by February
15, 2019 and plans to announce its decision on or before February 28, 2019
• This consultation may or may not result in changes in the MSCI Global Investable Market
Indexes2

CONSULTATION PROPOSALS
Proposal

TimingIncrease the inclusion factor of China A Large
Cap securities from 5% to 20% in two phases*

May 2019 and August
2019

1*7.5 percentage points in each phase2
Add ChiNext to the list of eligible stock
exchange segments

May 2019

Add China A Mid Cap securities with a 20%
inclusion factor in one phase

May 2020

3

3

RATIONALE FOR THE PROPOSAL
The broad participation in, and successful implementation of, the initial 5% inclusion
provided strong evidence of positive market accessibility of the China A shares market via
Stock Connect

Stock Connect
Robustness

Stock Connect has proven to be a robust channel to access China A
shares. Currently, Stock Connect daily quota and CNH liquidity are
sufficient to address an inclusion factor that is a multiple of the current
size

Market Accessibility
Improvements

Quadrupling of the Stock Connect daily limit, visible reduction in
trading suspensions and successful implementation of a closing auction
mechanism on the Shanghai Stock Exchange

4

BROAD PARTICIPATION DURING THE INITIAL INCLUSION
Since the announcement of the MSCI China A shares inclusion, more than 4,600 new Stock Connect
accounts have been opened to trade China A shares and the total Northbound Connect portfolio value
grew by US$46 billion

Number of SPSA accounts

Northbound Connect AUM

Number of SPSA accounts

Connect AUM (RMB bn)
665

6363

347
1700

Before inclusion announcement(June 2017)

Source: MSCI, HKEX

Sep-18Before inclusion announcement(June 2017)

Sep-185

PRO-FORMA WEIGHT IN MSCI EM INDEXWith an increase of the inclusion factor of China A Large Cap securities to 20%, the pro forma
index weight of China A shares in the MSCI Emerging Market Index would be 2.8% in August
2019. The addition of China A Mid Cap securities with an inclusion factor of 20% in May 2020
would increase the pro forma weight further to 3.4%

Others,20.6%

Brazil,5.8%
SouthAfrica,6.2%

Others,19.6%

China x A,
30.6%

Current
MSCI EM

India,
9.3%

Taiwan,12.2%

Korea,
14.8%

Brazil,5.5%
SouthAfrica,5.9%
India,
8.8%
China A
0.71%
Large Cap #:
235

Saudi
Arabia,2.5%

MSCI EM
with 20%
China A LC

Taiwan,11.6%

Korea,
14.0%

August 2019
Data as of September 3, 2018

Others,19.4%

China x A,
29.1%

Brazil,5.4%
SouthAfrica,5.8%
India,
8.8%

China A
2.82%
Large Cap #:249(14 ChiNext)

Saudi
Arabia,2.5%
China x A,
28.9%

MSCI EM
with 20%
China ALC+MC
Taiwan,11.5%

Korea,
13.9%

China A
3.36%
Large Cap +Mid Cap #: 434(31 ChiNext)

May 2020
6

MARKET LIBERALIZATION CONTINUESThe pace of market opening continued to accelerate in 2018 with more than 10 opening measures
year to date
Latest opening measures in the China financial sector
Nov 17
HKEX
launched
RDVP forConnect

Apr 18
PBoC
quadrupleddaily quota of
Stock Connect

Apr 18SAFE granted
QDII quota of US$
8.33 billion to 24
institutions after athree-year halt

Apr 18China granted
Japan Rmb 200
billion RQFII
quota, thirdlargest after HK
and USAApr 18SAFE widened
quotas of QDLPand QDIE
programs by US$
5 billion each

May 18MSCI
successfully
May 18June 18
HKEx introduced implemented
Shanghaithe first 2.5% A issued
USD/HKD
shares inclusion consultation
collateralenhancement
on closing
service inauctionConnect

May 18CSRC released
Administrative
Measures for
Foreign-Invested
Securities
Companies

June 18
SAFE removed
monthly repatriation
cap and principal lockup period, giving
QFII/RQFII the ability toaccess FX hedging
instruments andsimplifying document
filingJuly 18
China opened
A shares toeligible foreign
individual
investors

August 18
SSE
implemented
closing auction
similar to SZSE
on August 20,
2018

Aug 18MSCI
successfully
implemented
the second
2.5% A shares
inclusion

July 18
Ministry of Commerce to consult
on reducing the lock up period
on listed company investments
by foreign strategic investors
from 3 years to 1 year

7

VISIBLE IMPROVEMENT IN TRADING SUSPENSIONS# of trading suspensions in MSCI China A International IMI Index
90

900# of large cap suspensions# of mid cap suspensions# of small cap suspensions (Right)

70
9 Jul 2015
Large Cap: 56
Mid Cap: 76
Small Cap: 794

50 ~
30 ~

700

~ 500
~ 300

~
~
1 June 2017
Large Cap: 16
Mid Cap: 12
Small Cap: 119

25
20

250
5 Sep 2018
Large Cap: 0
Mid Cap: 0
Small Cap: 2

15

200
150

10

100

5

50

0

0

Sep/2014

Sep/2015

Sep/2016

Sep/2017

Sep/2018
8

CHINEXT REPRESENTS 20% OF THE CHINA A SHARES INVESTMENTOPPORTUNITY SET• The ChiNext board represents around one-fifth of the total China A shares opportunity set in terms of number ofstocks and free float adjusted market capitalization. It has a larger free float adjusted market capitalization thanthe Shenzhen main and SME boards• ChiNext securities are currently accessible through the expansion of Stock Connect. There are currently 194
ChiNext stocks eligible to be traded via Stock Connect
Distribution of A shares: # of stocks

Shenzhen
ChiNext
21%
Shanghai
Main
40%

Distribution of A shares: free float
market capitalization

Shenzhen
ChiNext
20%
ShanghaiMain49%

ShenzhenSME
18%

ShenzhenSME
26%
ShenzhenMain
13%

Shenzhen
Main
13%

Data as of September 3, 2018; Based on all listed China A shares in Shanghai and Shenzhen Stock Exchanges

9

COMPARISON OF LISTING REQUIREMENTS• Listing requirements of ChiNext board are not materially lower than the main board/SME board• Most tech companies made their debut in ChiNext, which is positioned as China’s “Nasdaq”
Items

Main Board & SME Board

ChiNext Market
Criteria I

Criteria II

Net Profit

Positive net profit in the last 3
Positive net profit in the past 2
consecutive years and the aggregate consecutive years, and accumulated
value is no less than RMB 30 million profit no less than RMB 10 million

Revenue/Cash FlowNo less than RMB 50 million in revenue during the past year and >30%
Accumulated revenue in past 3 years revenue growth during the past two years
no less than RMB 300 million, or
accumulative net operating cash flow
no less than RMB 50 million.

Net Assets

Share Capital

OthersTangible asset ratio > 80%

Total stock capital before issuance isno less than RMB 30 million

Positive net profit in last one year

No less than RMB 20 million at the end of the most recent reporting periodwith no uncovered losses
A total share capital of no less than RMB 30 million after the IPO

Shall not be subject to any of (6) circumstances which adversely affect its ongoing profitability

Source: Shenzhen Stock Exchange

10KEY DISCUSSION QUESTIONS• Is 20% inclusion factor for both Large and Mid Cap securities appropriate for the next phase of
A shares inclusion?
─ Are you anticipating any accessibility constraints that could make the proposed weightincrease challenging?
• The proposed implementation of the increase in inclusion factor to 20% for China A Large Cap
securities would coincide with the reclassification of the MSCI Saudi Arabia and MSCI
Argentina Indexes to Emerging Markets.
─ Is the management of potential turnover an important consideration?
• Is the differentiated treatment between China A Large and Mid Cap securities appropriate?
─ How much time would you require to be ready to cover the additional 168 China A Mid Cap
securities?
• Do you agree with the addition of ChiNext to the list of eligible stock exchange segments for
China?

─ Are you already invested in ChiNext securities?
11

REVIEW OF EXISTING ACCESSIBILITY CONSTRAINTS
The China A shares market has achieved significant progress in market opening. However, MSCI believes
further progress could be made with respect to its market accessibility standards and is seeking feedback
from international institutional investors as to what further improvements could facilitate theimplementation of the proposal
1.

Trading suspensions: while there has been visible improvement lately, trading suspensions in the China A
shares market remain unique when compared to other emerging markets. As a reminder, MSCI does notinclude and will remove stocks in prolonged suspension from the index

2.

Alignment of international settlement cycle: China currently operates on a T+0/1 settlement cycle.
Despite the availability of market solutions on T+1/2 DVP/RDVP through Stock Connect, the shortsettlement cycle onshore continues to pose operational challenges to global investors, especially for
those based outside Asian time zones

3.

Access to hedging and derivatives vehicles: Exchange restrictions placed on China A shares index
licensing of certain listed futures and options as well as certain leveraged and inverse leveraged
investment instruments, whether onshore or offshore, continue to hamper investors’ ability to manage
risk and gain exposure beyond the cash market

4.

Access to CNY for stock settlement: The current pool of CNH liquidity remains sufficient to address an
inclusion multiple the size of 5%. However, direct access to CNY for stock settlement could represent a
more efficient FX option for international investors and financial intermediaries

12

REVIEW OF EXISTING ACCESSIBILITY CONSTRAINTS (CON’T)
5.

Trading Holidays: As Mainland China and Hong Kong observe different holiday schedules, Stock Connect
is not open to international investors when Hong Kong is on holiday

6.

Access to IPOs and ETFs: IPOs and ETFs remain outside the scope of Stock Connect

7.

Stock Lending and Borrowing: While short selling is technically allowed, there is no functioning stock
lending and borrowing market. This hampers investors’ ability to implement their investment views

8.

Stability of the Stock Connect universe: Given that the eligibility universe of Northbound Connect is tied
to non-MSCI indexes, there is a dependency and forced turnover issue in the maintenance of MSCI
Indexes9.

Omnibus in Stock Connect: Given the implementation of the Broker-to-Client Assigned Number (BCAN)
in Stock Connect, a functioning omnibus structure may need to be developed to allow for efficienttransactions and achieving best execution

13

APPENDIXINDEX WEIGHT BY SECTOR AND SHARE CLASSHYPOTHETICAL FULL INCLUSION SCENARIOINDEX WEIGHT COMPARISON BY SHARE CLASS AND SECTOR
Index Weight by Sector

Index Weight by Share Class
22.7%

ADR

24.2%

Communication Services

24.8%

22.5%

Financials
25.1%

P CHIP

20.0%

Consumer Discretionary

27.4%

5.9%

Industrials
12.7%

RED CHIP

5.3%

Real Estate

13.8%

5.2%

Energy
28.9%

H

4.2%

Health Care

31.5%

3.7%

Information Technology
0.2%

B

3.4%

Consumer Staples

0.2%

2.8%

Utilities
10.4%

A

2.7%

Materials

2.3%

0%
0%

10%

20%

30%

10%

20%

30%

40%

40%

China with 20% China A LC+MC (post GICS change)
China with 20% China A LC+MCCurrent China

Current MSCI China (post GICS change)
Current MSCI China

Data as of September 3, 2018. GICS changes effective September 28, 201815

A HYPOTHETICAL FULL INCLUSION SCENARIOMSCI China (including A shares) could have a weight of 40% in MSCI Emerging Markets Index

Saudi Arabia,
2.2%

Others,17.1%
H Shares20.4%

Brazil, 4.8%
South Africa,
5.1%

MSCI
Emerging
Markets

India, 7.7%

Taiwan,10.1%

China,
40.3%

A Shares
36.8%

MSCI
China

B Shares
0.1%

ADRs
16.0%

Red Chips
9.0%

P Chips
17.7%

Korea, 12.3%

Data as of September 3, 2018, assuming Stock Connect eligible Large and Mid Cap A shares are fully included in the MSCI Emerging
Markets Index

16

APPENDIX
Turnover Analysis

INCLUSION TIMING OF A SHARES WITH SAUDI ARABIA• While each market classification decision is independent, unsynchronized timing in the
inclusion of the MSCI Saudi Arabia and Argentina Indexes and further inclusion of China A
large cap shares could create additional market volatilities for a longer period of time•

Synchronized rebalancing could save turnover by US$ 3.3 billion on a pro forma basis

Unsynchronizedrebalancing+ Saudi Arabia (May/Aug 2019)+ Argentina (May 2019)+ China A (May/Aug 2020)+ Saudi Arabia (May/Aug 2019)
Synchronized rebalancing + Argentina (May 2019)+ China A (May/Aug 2019)

May 2019 August 2019

May 2020 August 2020

Total EM Portfolio
Turnover Post
Inclusion

Saudi Arabia & Argentina: +$68bn
China A shares: -0.4bn
Rest of EM: -$67.6bn

Saudi Arabia & Argentina:-$1.2bn
China A shares: +60.9bn
Rest of EM: -$59.7bn

5.0%

Saudi Arabia & Argentina:+$66.8bn
China A shares: +$60.5bn
Rest of EM: -$127.3bn

n/a

4.9%

Index weights are based on data as of 3 September 2018. Portfolio flows are estimated based on assets benchmarked to MSCI indexes asof Dec 31, 2017, as reported on March 31, 2018 by eVestment, Morningstar and Bloomberg. The USD 3.3 billion turnover compares total
capital movements impacted by the synchronized vs. unsynchronized rebalancing.

18

APPENDIX
AN UPDATE ON TRADING SUSPENSIONSVISIBLE REDUCTION IN TRADING SUSPENSIONS SINCE 2015

• Compared to 2015, overall suspension
instances have declined by 80% in
2018

Suspension Instances by Duration (Investable Universe)
3500
26
3000

High # of 1-day
suspension due to annual
shareholding meeting• Reduction in trading suspensions isobserved across different durations

2500• Most suspension instances in China
rarely last for only one day

404

2000

• There remain many cases ofsuspensions exceeding 3 months induration

1500
283

201

1000

257

65
500

113

0
2012
1 --> 1 day

2013
2 --> less than 1 week

2014

2015

3 --> less than 1 month2016
4 --> less than 3 months

2017

2018

5 --> more than 3 months

20

MAIN REASONS FOR IMPROVEMENTS IN SUSPENSION
Recent improvements in trading suspensions can be attributed to tighter enforcement of suspension
policies announced in 2016
Reasons for improved trading suspension performance
1. Improved quality of suspension disclosures – listed companies are now required to disclose restructuring
details related to the underlying assets, counterparties, transaction methods and content of restructuringagreements. Exchanges strive to strictly control information disclosure consistency to curb “arbitrarysuspension announcements”
2. Narrowed scope for trading suspension – non-public offerings, transfer of control rights and external
investments are examples that do not justify long term trading suspension. Exchanges have been guiding
listed companies to reduce reliance on trading suspension when planning major corporate actions
3. Enhanced role of phased information disclosure – to reduce unnecessary suspension, exchanges urge listedcompanies to speed up audit work and follow the approval procedures thereby shortening the duration of
trading suspension

21

PROBABILITY OF REPEATED SUSPENSION
Probablity of current suspensions also suspended in thefollowing year

• By analyzing the trend of trading suspensions in
two consecutive years, we derive the historical
trend of repeated suspensions as a proxy formeasuring probability of repeated suspension

Small
82% 84%

Mid

78%

64%

58%

56%

55%
49%

• The probability of a large cap A shares to besuspended repeatedly has dropped to 10% in2017 from 78% in 2014

Large

41%

48%
39%

38%

41% 40%
35%
22%
14%

10%

• The probability of a large cap SOE A shares tosuspended repeatedly has dropped to 12% in2017 from 69% in 2014

Probablity of current suspensions also suspended in thefollowing year
2012
2013
2014
2015
2016
2017
Non SOE

SOE

89%• The probability of non-SOE going into repeatedsuspension is higher

69%
63%
52%

49%

48%

40%

37%

42%
35%
22%
12%

2012

2013

2014

2015

2016

Data include all companies suspended at any point in time but exclude 1 day suspensions

2017

22
22

TRADING SUSPENSIONS BY VARIOUS DURATION HORIZONS HAVE ALL
COME DOWN

Suspensions exceeding 3
months were removed from
the MSCI Investable
Universe since the new index rules were
implemented

Data include all companies suspended at any point in time but exclude 1 day suspensions

23

SUSPENSION BY SIZE-SEGMENT

Data include all companies suspended at any point in time but exclude 1 day suspension

24

SUSPENSION BY SECTOR

Industrials, Materials andConsumer Discretionary are thethree largest sectors with mostnumber of index constituents

Data include all companies suspended at any point in time but exclude 1 day suspension

25

SUSPENSION BY STOCK EXCHANGE

Data include all companies suspended at any point in time but exclude 1 day suspension

26

SUSPENSION BY OWNERSHIP TYPE

Data include all companies suspended at any point in time but exclude 1 day suspension

27

SUSPENSION BY INSTANCES
Instances of Suspension beyond a day by Ownership Type (2012-2018)

Instances of Suspension beyond a day by Exchange (2012-2018)

200
175

180
160

200

182
173

146

179

180

140

140

120

120

SOE

96

100

156

160

144

128

123

SH

80
60

57

60

SZ

99

Non SOE100
78

80

150

60
37

40

38

40

23
12

20

6

28
15

20
2

10

2

3

1

0

0
1x

2x

3x

4x

5x

6x

7x

8x

9x

10x

11x

12x

13x

1x

14x

2x

3x

4x

5x

6x

7x

8x

9x

10x

11x

12x

13x

14x

Instances of Suspension beyond a day by Exchange (2012-2018)

Instances of Suspension beyond a day by Size-Segment (2012-2018)
300
250

233

247

254

195

200

Large
Mid

145

150

Small
99

100

64

36

50

25

16

6

4

1

1

11x

12x

13x

14x

0
1x

2x

3x

4x

5x

6x

7x

8x

9x

10x

28

REGIONAL COMPARISON – STANDARD INDEX

June 1 2018:
First phase of Large
Cap China A shares
inclusion

Data shows the number of suspended securities in the respective MSCI Country Index as of each day from January 2017 to August 201829

REGIONAL COMPARISON – SMALL CAP INDEX

Data shows the number of suspended securities in the respective MSCI Country Index as of each day from January 2017 to August 201830

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