MSCI To Start Adding Chinese ADRs To Its EM Indexes This Month

Global equity index provider MSCI is planning to add some overseas-listed Chinese stocks — known as American Depositary Receipts (ADR) — to its emerging markets (EM) indexes this month, which should lead to billions of dollars pouring into such stocks from mutual funds and other investment companies and could eventually pave the way for mainland-listed stocks to find their way into global equity portfolios, Reuters reports.

Mutual funds, exchange-traded funds (ETFs), and institutional funds that track MSCI’s EM Index — one of the most widely-followed emerging markets indexes — will need to buy the stocks that the index provider adds in order to ensure that their funds closely track the index and provide a near identical return.

Around $1.6 trillion tracks MSCI’s EM index, including the largest EM ETF — the Vanguard Emerging Markets Stock Index ETF (VWO) with over $30 billion in net assets — and the second largest EM ETF — the iShares MSCI Emerging Markets ETF (EEM) with over $20 billion in net assets.

MSCI will be the first index provider to make such a move, and some market strategists believe that this could be a significant step towards the inclusion of mainland-listed Chinese stocks, Reuters says.

Analysts are estimating that the index rebalance could draw up to $70 billion in total flows into such stocks over the next six months and boost China’s weighting in the MSCI EM index — which only includes Chinese stocks listed in Hong Kong — to over 26 percent from just over 23 percent, Reuters says.

The new additions to MSCI’s EM Index are expected to be announced on November 12.

U.S.-listed tech giants like Alibaba (BABA) and Baidu (BIDU) are expected to be included in the index.

MSCI was previously considering adding China’s domestically listed stocks — known as A-shares — to some of its indexes, which drove a surge in China’s stock markets, however on June 10, MSCI told China that it needed to further liberalise its capital markets before being included into its EM Index.  This sparked a massive selloff that sent Chinese stocks plunging into a bear market and beyond over the summer.

MSCI has said that they estimate some $400 billion of investment to flow into Chinese stocks over time, if China’s A-shares were included into its EM Indexes.