China has made significant progress along the path of liberalizing its economy and financial markets, but impediments still remain that don’t allow the free flow of capital into or out of mainland China. As a result, Chinese companies have been forced to navigate a variety of trade-offs in determining where they should legally incorporate and where they should publicly list their equity. For that reason, Chinese companies currently trade in multiple currencies and many different exchanges, representing different share classes. Because of these complexities, Chinese equities currently only account for approximately 3% of global equity benchmarks, despite their companies making up a larger portion of global equity market capitalization.
After approximately five years and four consultations, MSCI has finally included around 230 A-share constituents as part of its MSCI Emerging Markets Index. It has limited the exposure to around 5% of a company’s adjusted market cap, representing less than 1% total exposure for the MSCI Emerging Markets Index. MSCI has issued another consultation on increasing the inclusion from 5% to 20% of a company’s adjusted market cap, potentially increasing total A-share exposure to 2.8% by August 2019. Eventually, at full inclusion, it is expected the total China exposure to grow to 40% of the MSCI Emerging Markets Index.
WisdomTree continues to remain ahead of the opportunity in China, having already included A-shares in both the WisdomTree Emerging Markets ex-State-Owned Enterprises Index and the WisdomTree China ex-State-Owned Enterprises Index, at a 5% and 25% exposure, respectively, since August 2017.
Incorporating A-Shares in the WisdomTree Emerging Markets Dividend Indexes
Effective as of the October annual rebalance, WisdomTree increased the number of our Indexes with A-share exposure by adding Chinese domestic listed equities that were eligible to be purchased on the Stock Connect program in the Indexes listed below. Each Index added approximately 100 companies based on the underlying rules, and the Chinese domestic exposure was capped at 5%.
