Indian investors could begin the trading session with some cheer on Wednesday morning as MSCI has postponed the decision to include China’s A shares in to its emerging market index. With this decision, a major overhang has been lifted from the Indian stock market since there were fears that the inclusion could trigger outflows exceeding $1 billion from Indian equities.

MSCI has decided against such a move for now stating that the inclusion will take place as soon as “a few remaining issues related to market accessibility have been resolved. We learned in our 2015 consultation that although institutional investors are eager to invest in China, a few more improvements must be made before they will consider the market to be sufficiently accessible.”

MSCI has also announced the formation of a working group with the China Securities Regulatory Commission to accelerate the resolution of the remaining issues.

Why it matters to India?

A buzz had been created in the global equity market in recent weeks as MSCI was set to announce its decision on the re-allocation of weights in its emerging market index on June 9. China, that currently has 26.2 per cent weight in the index, would have seen its share rise to 40 per cent if A shares had been included in the index. This would have squeezed the allocation of other countries. India’s shares in the index would have declined from 7.2 to 5.8 per cent.

The emerging market index consists of stocks from 21 emerging economies such as Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey. While China has the highest weight in the index currently, South Korea (14.3 per cent), Taiwan (12.5 per cent) and Brazil (7.4 per cent) are the other countries that have a larger allocation.

Some of the foreign investors investing in India use the Exchange Traded Funds route to invest in to India. The Global Emerging Market (GEM) is one of the most popular themes of ETFs benchmarked to the MSCI Emerging Market Index. Since these ETFs will have to reallocate their portfolio according to the index change, India could have witnesses selling in the aftermath of this re-jig. Thankfully that has now been staved off.

More about Chinese markets

Chinese companies can be listed on Shanghai as well as Hong Kong. A-shares are traded on the Shanghai exchange and are mostly available to domestic investors. H-shares are listed on the Hong Kong Stock Exchange. Foreign investors have so far been able to participate in Chinese stocks through H shares traded on the Hong Kong stock exchange. While the Chinese markets have been rallying sharply over the past year, the rise in Hong Kong listed shares has been more sedate. The forward price earning multiple of A shares is almost double that of H shares.

The over-valuation is largely due to lower liquidity and higher demand in the Shanghai and Shenzhen listed shares. This anomaly could have been adjusted had the inclusion been put through. The postponement of MSCI’s decision has perhaps put off a sharp decline in China’s A shares.

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