CONSULTATION ON CHINA
A-SHARES INDEXINCLUSION ROADMAP
Updated Post 2015 MSCI Market Classification ReviewApril 2016

© 2016 MSCI Inc. All rights reserved.
Please refer to the disclaimer at the end of this document.

BACKGROUND• In June 2015, MSCI announced that China A‐shares will remain on the 2016 review list forpotential inclusion into Emerging Markets.
• While the overall market accessibility of A shares had improved significantly over the years, the2015 consultation feedback identified three critical accessibility issues:
─ Quota allocation process─ Capital mobility restrictions
─ Beneficial ownership of investments• International institutional investors continue to be concerned by the liquidity and replication
risk that may result from potential renewed voluntary suspensions in trading on the local stock
exchanges of mainland Chinese companies.
• MSCI has also been discussing for some time with local Chinese stock exchanges the existenceof anti-competitive clauses restricting the launch of financial products by any financial
institution on any stock exchange internationally if these products are linked to indexes thatinclude China A-Shares.

2KEY HIGHLIGHTS OF 2016 PROPOSALMSCI is maintaining the proposal for a 5% partial inclusion of China A-shares into the MSCIEmerging Markets Index effective in June 2017 in one single phase.

The 5% partial inclusion approximates 1.1% weight of China A shares in the MSCI Emerging
Markets Index.
• MSCI has been working closely with the Chinese regulators to seek resolutions on theremaining market accessibility issues. Since June 2015, MSCI continues to observe positivemarket opening measures being announced and implemented :1. Linking QFII quota allocation to investment fund size
2. Relaxation of capital mobility restrictions under the QFII scheme
3. Simplification of the QFII application and quota granting process
4. Expansion of RQFII program from 12 cities to 16 cities• In addition, the planned CCASS enhancements of Shanghai-Hong Kong Connect to support
same day stock and money (RMB) settlement finality and the potential launch of theShenzhen-Hong Kong Stock Connect are expected to further improve the overall accessibility ofChina A-shares for international institutional investors.
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QUOTA AND CAPITAL MOBILITY• MSCI views the recent QFII policy changes announced by SAFE largely resolve, at least on paper,
the critical accessibility issues on quota and capital mobility

Quota Allocation
Process (QFII/RQFII)Capital Mobility
Restrictions(QFII/RQFII/StockConnect)

Remaining concerns to be addressedsince 2015 Annual Review

Newly implemented accessibility enhancement
policies• Ability to access quota commensurate with thesize of assets under management Base quota is now linked to AUM ranging from US$20mn toUS$5bn.
 Quota exceeding US$5bn subject to SAFE approval• Ability to secure additional quota with certainty
should the need arise No requirement for quota top-up unless it exceeds US$5bn
 Quota exceeding US$5bn subject to SAFE approval• A more streamlined, transparent and predictablequota allocation process Base quota automatically obtained based on AUM throughfiling with SAFE

• Extension of daily liquidity for all investment
vehicles, including open-ended funds, ETFs andseparate accounts

 Remittance period for QFIIs is removed
 Repatriation for QFIIs shortened to daily Separated Accounts no longer treated as closed-end fundand enjoy daily repatriation• Removal of capital lock-up and repatriation
restrictions on QFII/RQFII Lock up period shortened from 1 year to 3 months
 Monthly repatriation of 20% of NAV remain unchanged• Elimination of potential trading uncertainty due todaily limit on the Stock Connect

 Pending clarification

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REMAINING ACCESSIBILITY ISSUES TO BE ADDRESSED• The beneficial ownership issue on separate accounts, the widespread voluntary suspension
practices and the anti-competitive measures imposed by the local Chinese stock exchanges
which limit the fund vehicles available to international investors are the only remaining criticalissues that need to be adequately addressed to alleviate investors concern.
Outstanding Issues

Current Status•

Current QFII/RQFII framework does not provide a clear
recognition on the ultimate beneficial ownership of assets
under separate accounts.

 Client names can be now included in
QFII/RQFII separated accounts
 Pending further clarification update fromthe CSRC•

Widespread voluntary suspension practices prevented normal
market trading activities and caused liquidity and replication
concern.

 SSE plans to limit suspensions to no longer
than three months
 Pending further regulatory measures onlimiting voluntary suspension practices•

Existence of a provision that all financial products (including
Exchange Traded Funds) linked to an index containing China A
Shares need to be pre-approved by the local Chinese stock
exchanges even if listed internationally is unique among
emerging markets.

 Pending resolution by the local Chinesestock exchanges

Beneficial Ownership

Widespread voluntarysuspension

Anti-competitive clauses5

PROPOSAL FOR 5% INITIAL INCLUSION REMAINS INTACT• MSCI is maintaining its proposal to include China A-shares in the MSCI ChinaIndex in steps starting with a partial Inclusion Factor of 5%
─ The inclusion in the MSCI China Index would be reflected in its corresponding compositeindexes, including the MSCI Emerging Markets Index, simultaneously─ The pro forma MSCI China Index would be constructed based on one integrated Chinaequity universe comprising A-shares, B-shares, H-shares, Red-chips, P-chips and Overseas
listed China companies
─ A 5% Inclusion Factor would be applied to the FIF-adjusted market capitalization of China
A-shares in the pro forma MSCI China Index
─ The free float-adjusted market capitalization of China A-shares would be evaluated basedon the Foreign Inclusion Factor (FIF) subject to a 30% Foreign Ownership Limit (FOL)─ The implementation of this proposal would coincide with the May 2017 Semi-AnnualIndex Review
─ Any subsequent increase in the Inclusion Factor of China A-shares in the MSCI Emerging
Markets would be subject to positive market liberalization developments and publicconsultation with market participants• Please note that this proposal may or may not lead to any changes to the MSCI
Indexes
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POSSIBLE INDEX INCLUSION ROADMAP OF CHINA ASHARESCurrent Status• Inclusion of overseas listed Chinesecompanies such as Baidu and Alibaba
in November 2015 SAIR

Potential Initial Step:
Partial Inclusion (5%*)• Further improvements in quota
allocation mechanism and size ofoverall quota• Further relaxation on capital mobility
and other market accessibility
constraints

Potential Full Inclusion(100%*)• Abolishment of the quota system• Full liberalization of capital mobility
restrictions• Alignment of International
accessibility standards

Data as of March 30, 2016
* The percentage number refers to the Inclusion Factor applied to the free float-adjusted market capitalization of China A shareconstituents in the pro forma MSCI China Index. China A-share securities are subject to a foreign ownership limit of 30%# Overseas listed Chinese companies were included in Nov 2015

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TRANSITION ANALYSIS• If the partial inclusion proposal is accepted, the number of constituents in the MSCI ChinaIndex would increase from 155 to 609 with a majority of new constituents coming from A
shares. 1• The estimated one way index turnover will be 7.2%, comparable to the first-phase transitionof overseas listed China ADRs in November 2015.
MSCI China A
Large CapMid Cap

Current Standard
Weight
# Sec
100%
804
67.8%
302
32.2%
502

Pro forma (IF* = 5%)
Weight# Sec 1 way Turnover
100%
421
27.69%
84.4%
271
15.6%
150

# Securities
AddDel383
53625377

MSCI China A IMILarge CapMid Cap
Small Cap

100%
51.9%
24.7%
23.4%

1969302
502
1165

100%
54.8%
10.2%
35.0%

1910271150
1489

20.28%

145
525329204363775MSCI China
A Shares
B Shares
H Shares
Red Chip
P ChipOverseas#

100%
0.0%
0.3%
40.8%
19.6%
19.1%
20.1%

155027431
3414100%
4.0%
0.5%
38.6%
18.8%
19.0%
19.1%

609
421
483
3747
177.19%
4.03%
0.15%
0.70%
0.59%
1.32%
0.41%

454
421
29613
3000000

MSCI EMA Shares

-835
-

100%
1.1%

1289
421

1.97%
1.13%

454
421

-

MSCI EM (include LC only)
A Shares (include LC only)-835-100%
0.8%

1139
271

1.79%
0.95%

304
271

-

Data as of March 30, 2016
1. The pro forma index constituents are based on the MSCI China A International Index.

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KEY DISCUSSION POINTS
1. What have been your experience with regards to the recent QFII policy relaxations withregards to quota and capital mobility?

2. Do you now see the policies align to a satisfactory resolution for China A-shares to be
included in the MSCI Emerging Markets Index?
3. Given the QFII quota is now linked to the asset size of investors and potentially sufficient
to cater for a larger allocation, does a 5% initial inclusion still represent a reasonableproposal ?
4. Would you agree with the proposed one-phase transition plan and implementation
timeline?

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APPENDIX© 2016 MSCI Inc. All rights reserved.
Please refer to the disclaimer at the end of this document.

FOR EXISTING MSCI CHINA A INDEX CLIENTS• Existing clients who benchmarked to the MSCI China A Index can consider transitioning to theMSCI China A International Index. The index is available since 2015.
• In addition, MSCI proposes to maintain the MSCI China A Index as a domestic index for clients whowish to gain a deeper and broader access to the China A-share opportunity set─ Question: Does it make sense to disconnect the minimum size threshold with the MSCI Global
Investable Market Indexes?
MSCI China A International Index

Inclusion
factor of 5%

FIF Version
FOL= 0.3
Constituents=
421

Transition

MSCI Domestic China A Index

Current MSCI China A Index

DIF Version
No FOL
Constituents=
804

DIF Version
No FOL
Constituents=
804

LaunchData as of March 30, 2016

11KEY ACCESS CHANNELS TO CHINA A-SHARESEligible
Investors

RQFII

QFII

Institutional investors based in selected eligible
locations

Institutional investors that meet certain operation
and AUM requirements

Individual Quota: NoneBase quota ranging from US$20 million to US$ 5billion

All investors•Application
Process

CapitalMobility

Applications for base quota will be filed with SAFE
via onshore custodians
Applications for quota exceeding US$5 billion will
be required to apply to SAFE directly for approval

Need license (CSRC) and quota (SAFE)The process can range from weeks to months•

Open-Ended Funds:-Repatriation: Daily

Others:-Repatriation: Monthly

Open-Ended Funds:-Repatriation: Daily

Others:-Repatriation: Daily-Lock-up: None-Lock-up: 1 year

-Lock-up: 3 months-Lock-up: 1 year

-Remit Period: None

-Remit Period: 6months-Remit Period: N.A.

-Remit Period: 6 months-Others: Monthly
repatriation cannot
exceed 20% of NAV ofprevious year

-Others: Monthly
repatriation cannot
exceed 20% of NAV ofprevious year

-Others: Quota
required to be usedwithin 1 year upon
approval

EquityCoverageUniverseStock Connect

All securities listed on Shanghai and Shenzhen Stock Exchanges

N.A.

No restriction

570+ stocks listed on
Shanghai Stock Exchange

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POSSIBLE INDEX INCLUSION ROADMAP

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Data as of March 30, 2016

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