Tomorrow is a huge day in the history of China-style capitalism.
MSCI will decide June 9 whether to include mainland Chinese equities, known as the A-shares, in the MSCI Emerging Markets Index. If they do, it will begin the slow chiseling away of the great wall that separates China’s financial market from the world.
For starters, once the China A-shares are part of the MSCI Emerging Markets Index, then the two biggest exchange traded funds that track that index, Vanguard’s $47 billion Emerging Markets (VWO) ETF and BlackRock’s $30.7 billion iShares MSCI Emerging Markets (EEM) fund will have to rebalance to account for the change. More money will flow into China-based companies by default.
More importantly, the MSCI move opens the door to the maturation of the Shanghai and Shenzhen stock markets, both which are stereotypically known as retail gambling dens. But once the benchmarks change, as is happening now with the announcement on May 26 by the FTSE Group that it was creating an A-shares Index, mutual fund managers will start putting serious long term money to work in China. State Street Global Advisors is working on their own SPDR branded A-shares ETF. Deutsche Bank already has one (ASHR).
If this historical change in China’s financial markets was a baseball game, we’re just throwing out the first pitch.
“Given all the interest that we are seeing from investors, this is big,” says Sebastian Lieblich, MSCI global head of index research in Geneva. “The A-shares represent a relatively untapped $9 trillion market. I’d say this is a very big deal,” Lieblich says.
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