CONSULTATION ON CHINA
A-SHARES INDEXINCLUSION ROADMAP

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

EXECUTIVE SUMMARY• In June 2016, MSCI announced that will delay including China A-shares in the MSCI Emerging
Markets Index and China A‐shares will remain on the 2017 review list for potential inclusion
into Emerging Markets.

• While the overall market accessibility of A shares has continued to improve over the past 12
months, the 2016 consultation feedback identified three remaining obstacles that need to beaddressed:
─ Effective implementation of the QFII policy changes and removal of the 20% monthly
repatriation limit
─ Effective implementation of new trading suspension treatment
─ Resolution of pre-approval requirements by the local exchanges on launching financial
products• MSCI does not rule out a potential off-cycle announcement should significant positive
developments occur ahead of June 2017.

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KEY HIGHLIGHTS OF 2017 PROPOSALMSCI is maintaining the proposal for a 5% partial inclusion of China A-shares into the MSCIEmerging Markets Index effective in June 2018 in one single phase.

The 5% partial inclusion approximates 1.1% weight of China A shares in the MSCI Emerging
Markets Index.
• The Chinese authorities have demonstrated a clear commitment to bring the accessibility ofthe China A-shares market closer to international standards.
• Recent improvements in the accessibility of the China A-shares market include:─Resolution of the issues regarding beneficial ownership─Linking QFII Quota allocation to size of investors─Relaxation of capital mobility restrictions under the QFII scheme─

Enhanced regulations on trading suspensions• In addition, the Chinese regulators have also recently announced the expansion of RMB 250
billion RQFII quota to USA. The potential launch of the Shenzhen-Hong Kong Stock Connect isalso expected to further improve the overall accessibility of China A-shares.
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2016 CONSULTATION FEEDBACK• Of the various issues highlighted, only the beneficial ownership issue is considered to havebeen satisfactorily resolved
Highlighted Issues by MSCI

Status and Developments

Feedbacks from Market Participants

Beneficial Ownership Clarification on the beneficial ownership status ofsecurities in QFII and RQFII (including separateaccounts).

 International investors are generally
satisfied with the clarification by the CSRC

Quota Allocation Process
Capital Mobility Restrictions

 Base quota is now linked to AUM ranging from US$20mn
to US$5bn.
 Base quota automatically obtained based on AUM
through filing with SAFE Repatriation for QFIIs (including separate accounts)
shortened to daily Feedback were generally positive however
investors need more time to assess theeffectiveness of the implemented changes
 However, most investors viewed 20%
monthly repatriation limit as problematicWidespread voluntarysuspension

 Clarification of trading suspension policies from bothShanghai and Shenzhen Stock Exchanges.
 Company can only apply for suspension after providing
proper reasons and submitting necessary documents tothe exchanges
 Trading suspension ranges from 10 days to 5 months

 Investors generally welcome greater
clarity of the trading suspension rules
 More time is needed to assess theeffectiveness of the recently announced
policy Remain unaddressed Institutional investors expressed strong
concern over the pre-approvalrequirements and agreed that the issue
needs to be satisfactory resolved before
the inclusion happens

Pre-approval requirements
imposed by stock exchanges

4REMAINING OBSTACLES TO BE ADDRESSED
1. Effective implementation of the QFII policy changes and removal of the 20% monthly
repatriation limit•

Progress has been made on the QFII quota allocation and capital mobility issues but a period ofobservation on the effectiveness of implemented changes is still required•

Positive experiences on quota applications by international investors, as well as seamless executionof daily capital repatriation•A complete removal or substantially increase the 20% monthly repatriation limit with a shorter
repatriation horizon

2. Effective implementation of new trading suspension treatment•

MSCI welcomes the implementation of the new trading suspension policies but a period ofobservation on the effectiveness of implemented changes is still required•

Significant reduction of the number of suspended stocks on the Shanghai and Shenzhen exchanges

3. Resolution of pre-approval requirements by the local exchanges on launching financialproducts•Ability to launch financial products by any financial institution on any stock exchange internationally
if these products are linked to indexes that include China A-shares

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INDEX INCLUSION ROADMAP OF CHINA A-SHARESCurrent Status

Partial Inclusion (5%)

Full Inclusion (100%)

Data as of June 10, 2016

Timeline of Recent Developments
Feb 2016• Linking QFII Quota allocation tosize of investors• Relaxation of capital mobility
restrictions under the QFII
schemeMay 2016

Jun 2016• MSCI resumes consultation Remaining Obstacles:on China A-shares inclusion • Effective implementation of the QFII policy changes androadmap
removal of the 20% monthly repatriation limit• Effective implementation of new trading suspension
treatment• Resolution of pre-approval requirements by the local
exchanges on launching financial products

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TRANSITION ANALYSIS• If the partial inclusion proposal is accepted, the number of constituents in the MSCI ChinaIndex would increase from 150 to 620 with a majority of new constituents coming from A
shares. 1• The estimated one way index turnover will be 7.7%, comparable to the first-phase transitionof overseas listed China ADRs in November 2015.
MSCI China A
Large CapMid Cap

Current Standard
Weight# Sec100%
814
66.7%
302
33.3%
512

Pro forma (IF* = 5%)
Weight# Sec 1 way Turnover
100%
431
27.30%
82.7%
268
17.3%
164

# Securities
AddDel383
53927375

MSCI China A IMILarge CapMid Cap
Small Cap

100%
50.3%
25.1%
24.5%

1981
302
512
1167

100%
55.0%
11.6%
33.4%

1847
268
164
1415

20.40%

98
527
250

232
39375
2

MSCI China
A Shares
B Shares
H Shares
Red Chip
P ChipOverseas#100%
0.0%
0.3%
39.9%
19.4%
21.0%
19.4%

150027230
33
13100%
3.9%
0.4%
37.7%
18.5%
21.2%
18.3%

620
4314
8337
49
16

7.71%
3.95%
0.15%
0.86%
0.61%
1.80%
0.43%

470
431
2117163000000

MSCI EMA Shares

-

835
-

100%
1.1%

1305
431

2.15%
1.12%

470
421

-

MSCI EM (include LC only)
A Shares (include LC only)

-

835
-

100%
0.8%

1141
268

1.96%
0.93%

306
271

-

Data as of June 10, 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 has been your experience with regards to:─The QFII policy relaxations with regards to quota allocation and capital mobility?

─The change in regulation governing trading suspensions on the A shares market?

2. Do you see the 20% monthly repatriation limit as a road block to the inclusion?
─Would the launch of the Shenzhen Stock Connect alleviate the 20% monthly
repatriation issue?

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 ? Should MSCI consider a higher percentage for the initial inclusion?
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.

PROPOSAL FOR 5% INITIAL INCLUSION REMAINS INTACT• MSCI is maintaining its proposal to include China A-shares in the MSCI China
Index 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 China
equity 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 2018 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 public
consultation with market participants• Please note that this proposal may or may not lead to any changes to the MSCI
Indexes10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=431

Transition

MSCI Domestic China A Index

Current MSCI China A IndexDIF Version
No FOL
Constituents=814

DIF Version
No FOL
Constituents=814

LaunchData as of June 10, 201611

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: None

Base 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 uponapproval

EquityCoverage
UniverseStock Connect

All securities listed on Shanghai and Shenzhen Stock Exchanges

N.A.

No restriction

570+ stocks listed onShanghai Stock Exchange

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POSSIBLE INDEX INCLUSION ROADMAP

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Data as of June 10, 2016

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MSCI serves 97 of the top 100 largest money managers, according to themost recent P&I ranking.
For more information, visit us at www.msci.com.

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