To listen to the stockbrokers, it is a “pivotal moment”, a “major step forward” that will “bring Chinese equities into mainstream investment”. MSCI, the index provider, has decided to include mainland Chinese shares in its main global and emerging market benchmarks. The talk of a watershed is misguided, however. This is a test for Chinese stock markets, not a certification that they have met global standards or that future integration is assured, or even likely.
Consider the extreme caution with which MSCI has decided to represent mainland stocks in its indices. The Shanghai and Shenzhen markets together make up the second-largest equity market in the world by capitalisation, at some $7tn. Yet the shares in just 222 large-cap companies will be included by MSCI. All of them are already part of the so-called stock connect scheme, which allows global investors to buy and sell A-shares in freely tradable Hong Kong dollars. This solves (for now) the problem of China’s tight currency and capital controls.
When the indices are updated in about a year’s time, the mainland companies will be included in the index at only 5 per cent of the weight of their full market values. The shares will therefore represent less than 1 per cent of the MSCI’s emerging markets index, and 0.1 per cent of its world index. The 1.2 per cent rise in the mainland indices after the MSCI announcement reflected both the fact that the change was expected and its ultimately modest size.