The full inclusion of China A-shares in MSCI’s influential emerging-market indices could be at least five years away, say investment industry participants. In the meantime, the index provider is keeping an eye on the next steps in the process, after it approved the partial inclusion of mainland stocks in June.

One of the big remaining obstacles to Chinese A-share access is the daily limit under the Stock Connect trading link between Hong Kong and Shanghai, said Chia Chin-Ping, Asia-Pacific head of research.

If the daily limit is breached, investors might not be able to trade, so there remains trading uncertainty, he told AsianInvestor. “Institutional investors value certainty; they want to reduce the risks.”

As a result, one of the preconditions for MSCI to increase the weighting depends on how fast the daily limit is removed. That's a critical part.

Inclusion steps

Once MSCI decides to raise the weighting of A-shares in the EM indices, it has several options for doing so, noted Chia. One would be to raise the 5% inclusion factor of the 222 stocks currently admitted to 20%, 50% or 80% hypothetically. It could also include mid-cap stocks, he said, or do both at the same time.

The pace of inclusion could quickly accelerate if conditions improved substantially –– for example if the daily limit on Stock Connect were removed. “I don't think we'll limit ourselves to a incremental 5% discussion every year,” explained Chia.

“The SME (small and medium-sized enterprise) and GEM (growth enterprise market) boards - for smaller companies – in China are on our radar,” he noted.

Currently MSCI’s inclusion criteria only captures listings on the main board that are available to Stock Connect investors, noted Chia; that is, only large-caps.

“While the common investor perception is that companies on the GEM board may not have a proven track record and some of them may be a bit volatile, some investors also point to us that there are interesting companies in those boards,” he added.

The index provider does not make judgements on the quality of stocks included in the index, said Chia. That is for investors to decide. “The role of a good benchmark is to comprehensively represent and accurately track the investable opportunity set.”