A-Shares ETFs Eye Recovery on MSCI Chatter

The Shanghai Composite, the benchmark equity index for stocks trading on mainland China, has tumbled almost 13 percent over the past month, but that slide is not a factor in MSCI Inc.'s MSCI decision regarding the inclusion of China A-shares in major global equity indexes such as the MSCI Emerging Markets Index.

“U.S. index provider MSCI said recent violent market gyrations in China, and a barrage of interventions by the authorities to stop the rout, will not be a factor in deciding whether to include China-listed shares in its emerging markets index,” according to a Reuters report out late Tuesday night U.S. time. 

In June, MSCI delayed the inclusion of A-shares in its global indexes, saying in a statement issued at that the time “Liquidity is a critical component of the investment process. Regardless of the channel they use, investors say that they need access to daily liquidity. They believe that this access should apply to all investment vehicles.”

Ah yes, liquidity. The notion of being able to buy and sell with ease and what should be a tenet of market accessibility, one of the issues MSCI cited in delaying the A-shares promotion. Though it was not mentioned in the Reuters report, it is not outlandish to assert that Beijing's heavy-handed approach in attempting to manage the mainland sell-off threatened market accessibility with freezing, on some days, more than half stocks trading in Shanghai and Shenzhen.

Still, the perception that A-shares are still on track to join MSCI indexes could provide some temporary relief for exchange traded funds such as the Deutsche X-trackers Harvest CSI 300 China A-Shares ETF ASHR, the largest A-shares ETF trading in New York; and the KraneShares Bosera MSCI China A ETF KBA, the only A-shares in the U.S. tracking an MSCI index.

Over the past three months, nine of the 10 worst-performing non-leveraged ETFs are China or China-heavy funds and four of those nine are A-shares ETFs.

In June, MSCI said it could lift A-shares to its international indexes outside of its regular reclassification schedule. As for the the Renminbi Qualified Foreign Institutional Investor (RQFII) scheme, which allows the funds to purchase A-shares equities, MSCI said, “Global investors told MSCI that having reliable access to quota is a critical requirement.”

ASHR and its small-cap counterpart, the Deutsche X-trackers Harvest CSI 500 China A-Shares Small Cap Fund ASHS, have, on occasion, been forced to limit creations due to robust demand, but Deutsche Asset & Wealth Management, the sponsor of those ETFs, has consistently been able to quickly procure additional quota for ASHR and ASHS.

In May, MSCI rival FTSE Russell said it would allow A-shares into the FTSE Emerging Markets Index and other global benchmarks. That decision means the Vanguard FTSE Emerging Markets ETF VWO, the largest emerging markets ETF, will add A-shares later this year.

“A decision to include domestic Chinese stocks in the MSCI Emerging Markets Index would have injected $400 billion of funds from asset managers, pension funds and insurers into mainland China's equity markets over time, MSCI has estimated,” according to Reuters.