Changes to the Emerging Markets Club: China (A Shares), Argentina and Saudi Arabia

There have been some noteworthy recent changes in the composition of two broad emerging market indexes that have investors taking notice. Domestic Chinese equities now have a greater presence in both the MSCI and FTSE Emerging Markets Indexes—with more shares still to be added. Meanwhile, Argentina and Saudi Arabia also saw status upgrades. Our Dina Ting and Louis Hsu discuss the significance of these changes for these countries, and for investors.

As the end of summer approaches, we are taking stock of significant changes to both the MSCI Emerging Markets (EM) Index and the FTSE Emerging Index. The changes to these broad emerging market indexes have been taking place in phased approaches since May 2018 for MSCI and March 2019 for FTSE. Each index provider is taking a slightly different approach to including additional equities.

The most recent prominent index changes so far in 2019 included:

  • The increased allocation to domestic Chinese equities (known as A shares).
  • The inclusion of Argentina and Saudi Arabia due to their reclassification to emerging market status from frontier and stand-alone,1 respectively.

China’s Evolving Presence

China’s presence in the MSCI EM Index and the FTSE Emerging Index has evolved due to the inclusion of China A shares. These represent shares of mainland China-based companies denominated in renminbi and were unavailable to foreign investors until 2002 upon the implementation of the Qualified Foreign Institutional Investor (QFII) program.

The subset of China A shares added were even more accessible through the Shanghai and Shenzhen Stock Connect program, which does not require a quota as in the QFII program. The inclusion of the A shares reflects improvements the Chinese government has made to create a more open market by increasing accessibility and transparency.