MSCI Annual Market Classification Review - China A's to Join, Saudi Arabia Under Consideration

MSCI has released the results of the 2017 annual market classification review, as scheduled.
> China A-shares to join the MSCI EM. After four years of annual reviews, China A-shares will join the MSCI EM and related indexes. MSCI stated that the decision has "broad support" from the investment community given the improvements in Chinese mainland market accessibility (especially the Stock Connect scheme) and reduced preapproval requirements for financial products.
Regarding future inclusions of more A-shares, MSCI states, "further inclusion will be subject to a greater alignment of the China A-shares market with international market accessibility standards, the resilience of Stock Connect, the relaxation of daily trading limits, continued progress on trading suspensions, and further loosening of restrictions on the creation of index-linked investment vehicles."
> MSCI will include a greater number and weight of A-shares in the indexes than previously expected. Whereas MSCI in March had guided for 169 instruments to be eligible, which our updated estimates suggested would constitute 0.4% of the revised MSCI EM, MSCI has decided that 222 large-cap A-shares will join. Including the 5% weight prorating (a.k.a. "inclusion factor") long guided by MSCI, the new entries reach a 0.73% pro forma weight in the EM index on MSCI's numbers. MSCI added that in the future the 5% inclusion factor could be raised as part of the process of expanding A-share coverage.
> The A-shares are to be added in two tranches because daily limits remain too low for one. The first will be added along with the May 2018 semiannual rebalancing and second with the November 2018 quarterly rebalancing, in order to allow investors not to break Chinese daily limits. That this step is necessary despite all of MSCI's talk of improved market accessibility and capital flows is a bit ironic, and the index provider notes that it will move to a one-step integration if daily limits are adequately raised or abolished between now and next May.
> Weights and flows. The A-shares' 0.73% pro forma weight suggests passive inflow of more than $595 mln will come from other markets. Russia's weight looks set to slip 2 bps in the move to 3.08%, resulting in outflow of less than $20 mln.
> Argentina's return from FM to EM put off for now. MSCI will not promote Argentina, citing investors' desire to see the country further move past its history of market-unfriendly actions. Had it been promoted to EM, we estimate that Argentina would have been given a 0.5% weight in the index. Argentina will remain on the list for consideration next year.
> MSCI opening consultation on whether to include Saudi Arabia in EM. Given the improvement in market accessibility, MSCI will consider adding Saudi Arabia to the MSCI EM. Though not explicitly stated, the decision would presumably come in next year's June annual market review. If accepted, Saudi Arabia would then join the indexes as part of the May 2018 semiannual rebalancing.
Though ongoing developments in ownership limits and the possible IPO of Saudi Aramco leave many questions about just how big the free float of the market would be if included into EM, our very preliminary numbers suggest a size similar to Russia's as a conservative starting point.
> Nigeria decision delayed. Last of all, MSCI will delay deciding on whether to reclassify Nigeria from FM to standalone until the November 2017 semiannual rebalancing.