MSCI just rejected China – but it’s only delaying the inevitable

150610-MSCI — China is going to become an ever-more important sector in emerging markets

A lot of asset managers might be breathing a bit of a sigh of relief today, as Peter Thal Larsen notes on Reuters.

In a surprise decision, MSCI the company behind some of the most widely used benchmark indices for emerging markets has decided against including China's A-shares in its global indices.

MSCI had been expected to admit the A-Share index, at least partially, to its flagship emerging markets index. If it had, then the various global funds that track the index around $1.7trn worth, according to John Authers in the FT would have needed to pump billions into the Chinese market, just to stay in line with the revised index.

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That's not necessarily something that lots of wealth managers are keen to do right now, given that the Chinese stockmarket has been on a massive bull run recently, and is widely seen as being due a correction.

Even so, they should prepare themselves it's only a matter of time before China does get added to the index.

The reasons behind the rejection

But it's also clear that this is just another step along the way to inclusion. Some reports suggest that there could be another review when China is ready; others that the decision may be pushed out until May 2017.

Whatever the case, given China's sheer size, it's going to become an ever-more important sector in emerging markets.

Why we're sticking with China

being underweight China is a matter of inertia

Indeed, reports Authers, "if all A-shares were to be included at their full weighting, China would take up 43.6% of the emerging markets index".

Given its sheer scale and developing importance to the global economy, we're still backing China. The next few years might be a bit choppy, but as MoneyWeek editor-in-chief Merryn Somerset Webb recently put it, "if the Chinese market follows the Japanese and you can cope with the volatility, there's a good 800% to go."

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