China could move deeper into portfolios

MSCI to announce if A-shares included in index




For all its economic power and investment interest, China has remained closed to smaller U.S. investors. One can buy stocks of American companies doing a lot of business in China (think Yum Brands & its KFC business), or buy shares of Chinese companies trading on U.S. stock exchanges (and thus, subject to American security laws and regulations). But getting inside China has been difficult for American retail investors.

That may change in the week ahead.

On Tuesday, MSCI, the company behind the leading stock market index for emerging markets, will announce its decision if it will include China A-shares in its index. China A-shares are stocks that trade on mainland China stock exchanges. They trade in Chinese currency.

More than $1.5 trillion of investor assets are benchmarked to MSCI’s Emerging Markets Index. It is the leading index to gain exposure to potentially fast growing companies, but in volatile economies such as Brazil, India, Turkey and China. Trillions more of investor dollars are tied to additional MSCI global indexes.

China represents 17 percent of the global economy. It is a far smaller slice of the stock investment universe — about 10 percent.

For years, A-shares in China have not been included in worries about Chinese regulations limiting the flow of foreign money in and out of the country. The Chinese practice such as halting trading when company news is released also discouraged major American investment indexes from jumping in.

But a key sticking point is the insistence on control. Chinese regulators have to approve any non-Chinese investment products, such as MSCI indexes, that include A-shares.

If MSCI opens the door, such concerns will limit the inclusion of A-shares — for the time being. But it would signify a further inclusion of China into the global investment market.