How does MSCI compare with other available options to invest in China in terms of corporate health?

• There are more ways to invest in the Chinese market than ever. Although valuation and investors’ demand play a vital part in equities, as well as A-H share arbitrage opportunities, fundamentals are equally important. We find that access through the MSCI index does not ensure the best underlying at least in terms of corporates’ financial health. The Shenzhen Stock Connect is by far better. The key reason is that financials have the largest weight in MSCI’s new inclusions, which have been clear underperformers.
• For non-financials, the MSCI basket includes somewhat better corporates in terms to repayment ability than those cross-listed overseas (mainly in Hong Kong), but still far from those accessible through the Shenzhen Stock Connect, which have the best average repayment ability and profitability.
• This basically means that China A-shares entry into the MSCI index might still not offer the best option for investors as compared to the existing ones (in particular the Shenzhen Stock Connect). Of course, this observation abstracts from valuations and other considerations but does give a warning signal to too much euphoria regarding MSCI’s new inclusions.

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