Avoid the Crowds in Chinese Stocks

As MSCI considers boosting the allocation to Chinese onshore stocks in its emerging-market indices, global investors are pumping money into the market. But watch out for crowds. Flows into China are concentrated in a small group of large-cap stocks.

On February 28, index provider MSCI will decide whether to begin increasing the weight of onshore Chinese A-shares in its emerging-market and global indices in May after first opening the door last May. If approved, MSCI will quadruple the value of large-cap China A-shares in its benchmarks, forcing index funds to add to their positions. For example, in the MSCI Emerging Markets, A-shares will increase from 0.7% of the index to 2.8%. This will be done by raising the inclusion factor for A-shares from 5% to 20% of each stock’s free-float adjusted market capitalization by August. Mid-cap stocks may also be added.