Benchmark Effects from the Inclusion of Chinese A-shares in the MSCI EM Index

Abstract

We study the implications of benchmark indexing for emerging economies by focusing on the inclusion of Chinese A-shares in the MSCI EM index. Making use of a rich dataset on fund allocations and flows between 2015 and 2020, we document an escalating weight of Chinese exposure in mutual funds and an increasing concentration of fund portfolios. We rely on a Bayesian VAR model to show that the inclusion of A-shares in the MSCI EM index has fostered capital flows into China and has, at the same time, reduced the flows to the other emerging economies listed in the same index.

Keywords: benchmark indices, international portfolio flows, China

JEL Classification: F21, F36, G11, G15