MSCI announced that after three years of declining to do so, it will now add 22 of China’s so-called “A” shares to its Emerging Markets Index. The move is a boon to the perceived legitimacy of the RMB, and ultimately adds another stamp of approval to the (some) Chinese investments.
Notably, however, the move was limited to shares eligible for trading via the Stock Connect program. Furthermore, MSCI is for the time being only weighing each stock at 5 percent of its market capitalization, reportedly to encourage authorities to continue reforms.
This approach is savvy, and similar to one that I argued should have been considered in the IMF’s inclusion of the RMB in its basket of reserve currencies. In that case, when deciding to adopt the RMB in its Special Drawing Rights, the IMF could have weighed the currency according to the monetary and macroprudential reforms supporting the currency’s internationalization. The IMF ultimately took a more straightforward approach, declining any currency weightings. Apparently, investors are not just a little more creative—but in this case, also more conservative—than economists.