A-share inclusion proposal will be revisited in MSCI's 2017 Market Classification Review if not earlier. Another year of capital market liberalization ahead of us to look forward to.

1. June 15 , 2016
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Moving Forward
-Another year to look forward to
The Journey to Inclusion
June 14th’s decision by MSCI to delay China A-share’ inclusion in its Emerging Markets Index has concluded
the third attempt China A-share has made at the MSCI index family. With a few more lingering issues
pending resolution, China A-share inclusion proposal still remains as part of the 2017 Market Classification
Review. Looking back, every step along the way has marked a solid step towards China’s capitalmarket
liberalization.
KeyMilestones
Jun 2013 MSCI initiatedconsultationon market reclassificationof China A-shares intoEMindex
Mar 2014 MSCI releasedthe A-share inclusionroadmapandinitial inclusionfactor
Apr 2014 SH-HKConnect program wasannounced
Jun 2014 MSCI decided not to include China A-share inthis round ofconsultationpending issues to be resolved
Nov2014 SH-HKConnect program went online
Mar 2015 SZ-HKConnect program being mentioned
May2015 Quota allocation, Capital mobilityand Beneficial ownership were identifiedbyMSCI as concerns
Feb 2016 Major update tothe existingQFII scheme;quota allocation andcapital mobilityissueswere resolved
Apr 2016 Additional improvement demandedbyMSCI (voluntarytrading suspension and anti-competitive clauses)
May2016 SH and SZ stock exchanges rolledout rules onvoluntarytrading suspensions
Jun 2016 PBOC announcedgranting250 BillionRMB RQFII to the United States
Jun 2016 MSCI decided to delayinclusionof China A-shares, but will keepit in 2017 Market ClassificationReview
Source: ChinaAMC
The InclusionRoadmap
With the inclusion decision to admit China A-share into the MSCI Emerging Market Index, China A-shares
will represent 1.1% of the EM Index, bringing China’s weight to 27.3 (including Chinese shares listed in
overseas markets).
The initial 5% inclusion will bring approximately 21.9 Billion USD inflow to A-shares (Exhibit 1). The actual
inflow might be smaller than that given that some the actively managed funds might choose to time the
market. Comparing to A-share’s 6 Trillion USD market capitalization, the magnitude of the inflow might not
be significant, but it carries more far more symbolic meanings.
The building-block method of index construction adopted by MSCI means that once A-share is included in
the MSCI EM index, it will also go into the Asia ex Japan and ACWI indices. Once fully included, the
combined estimated inflow from these indices would total to 379 Billion USD, or more than 2 Trillion RMB,
that is a figure that cannot be ignored. However, from the experience of Korea and Taiwan, the journey from

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0
5
10
15
20
25
30
35
40
45
1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005 2009 2013
Korea
Japan
Taiwan
China
Overall
USA
China A
Annual increase for foreign equity ownership:
Japan: 0.78% in 27-year history;
Taiwan: 0.97% in 16-year history;
Korea: 1.19% in 15-year history;
USA: 0.25% in 53-year history.
China: We expect 0.8% annual
initial inclusion to full inclusion could take5 to 10 years.
Exhibt1: Inflow Estimates
Source: MSCI, ChinaAMC
Changes Are Good and For Good
What to expect once included? The answer may lie within the precedents set by Korea and Taiwan. The
following benefits have been observed in these two markets since their inclusion into the MSCI index family.
 More balanced investor structure
 Improved investment styles
 Further integrationwith global markets
Historically, the China A-share market has been dominated by retail investors and had limited institutional
participation, especially that of foreign institutions. (Exhibit 2) Retail investors are typically more vulnerable
to psychological factors such as greed and fear. The herding effect of retail dominated market could also
amplify market swings and volatility. Over time, the investor base of China’s capital market starts to
gravitatetowardboth institutionalization and internationalization. (Exhibit 3)
Exhibit2. Foreign EquityOwnership Comparison Exhibit3: Structuraltrends ofChina A-shareholding structure
Source: CEIC, Wind
As a result, one key observation in such market environment is the high turnover rate. Yet, it is expected
to taper once the market becomes more institutionalized with the inclusion, as evidenced by what
happened in Korea and Taiwan. (Exhibit 4)
Asset Tracking theIndex
(USD Tn)
A-share weight
(%)
Estimated inflow
(USD Bn)
5% Inclusion
MSCI ACWI 2.8 0.1 2.8
MSCI EM 1.5 1.1 16.5
MSCI Asia ex Japan 0.2 1.3 2.6
Total 21.9
100% Inclusion
MSCI ACWI 2.8 2.3 64.4
MSCI EM 1.5 18.2 273
MSCI Asia ex Japan 0.2 20.7 41.4
Total 378.8
46% 42%
19%
39%
24%
37%
15%
8% 11%
29%
10%
16%
49%
47%
44%
40%
22%
27%
28%
1%
5%
2% 7%
31% 24%
32%
13%
33%
0%
20%
40%
60%
80%
100%
China A
(2013)
China A
(2020E)
Japan
(2014YTD)
Taiwan
(2013)
Korea
(2012)
US
(2010)
EU
(2012)
Retailors Institutional Investors Gov't and Corporates Foreigners

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26.3
10.4
4.6
28.1
12.9
5.4
19.7
0.9
3.0
0
5
10
15
20
25
30
US China Japan Euronext Canada Germany India Swiss Korea Australia
Market Cap Turnover Free float adj. Mkt_cap included in MSCI AC World Index
Exhibt4: Turnovercoming downsincethe inclusion,Korea(LHS) andTaiwan(RHS)
Source: CICC
Owing to the capital control, the Chinese capital market has been relatively isolated to the global markets
until the beginning of the new millennium. Since the launch of the QFII scheme back in 2002, the past
decade has marked a journey of market liberalization. Yet, the potential inclusion is like no other, it marks
the pinnacle of recognition by the global investment communities regarding the market’s accessibility and
readiness to be part of a global market. Precedents set by Korea and Taiwan have prophesied further
integration and synchronization with global markets, as evidenced by rising correlation with S&P500.
(Exhibit 5)
Exhibt5: correlationwithUS equity market upsince inclusion Korea(LHS) and Taiwan(RHS)
Source: CEIC, CICC
China Is Simply Too Big To Ignore
Many global investors own an incomplete China portfolio and have overlooked the potential strategic role of
China A-shares in their global portfolio, deterred by benchmarking, accessibility and operational concerns.
As the China capital market liberalizes, China A-shares could well become part of global equity investors'
opportunity set. (Exhibit 6)
Exhibt6: MarketCap, Turnover and MSCI AC World IndexWeight
Source: CEIC, Wind
Domestic Overseas Domestic Overseas
US$ tn
Since its inclusion in 1998, retail
turnover kept lowering
Like Korea, Taiwan local investors’ turnover
has come down
TWSE 100% inclusion intoMSCIKOSPI 100% inclusion into MSCI

4. 4 / 7
A-share offers significant benefit of diversification
Adding China A-shares to a global equity portfolio could potentially provide enhanced diversification and
improve the potential to capture a long-term economic growth premium. (Exhibit 7)
Exhibt7: Correlation ofMonthly Returns (Dec2004 –Jun2014)
Source: MSCI, Current MSCI China Index which excludes A-shares. Based on unhedged gross monthly return series in USD.
At a country level, the China A-share market is the only market among the major developed and
emerging countries that has enjoyed such a low correlation with global indexes. (Exhibit 8). For example,
Brazil, India, Russia, South Africa and China (without A-shares) all had correlations with developed
markets in the range of 0.72 – 0.80, based on the period ending June 2014.
Exhibt8: Correlation ofMonthly Returns (Dec2004 –Jun2014)
Source: MSCI, Current MSCI China Index which excludes A-shares. Based on unhedged gross monthly return series in USD.
Valuation is also attractive
June 2016 marks the one year anniversary for the market reaching its peak in summer 2015. Since then the
market has entered into a prolonged phase of correction and consolidation. Yet, blue chips have already
seen their valuation dipping into the attractive zone (Exhibit 9), especially those names well positioned to
benefit from policy and supply side reform expectations will be the first to recover in valuation.
ACWI EAFE World EM FM ChinaA
ACWI 1
EAFE 0.98 1
World 1.00 0.98 1
EM 0.91 0.89 0.88 1
FM 0.64 0.64 0.64 0.61 1
ChinaA 0.41 0.39 0.39 0.39 0.25 1
ACWI EAFE World EM
ChinaA 0.41 0.39 0.39 0.49
China 0.75 0.75 0.72 0.88
USA 0.96 0.9 0.97 0.8
Japan 0.76 0.81 0.76 0.69
Europe 0.97 0.99 0.97 0.87
Brazil 0.79 0.78 0.76 0.91
Russia 0.79 0.79 0.76 0.86
India 0.78 0.75 0.75 0.85
South Africa 0.82 0.82 0.8 0.87
Taiwan 0.79 0.76 0.76 0.85
Korea 0.82 0.79 0.79 0.88

5. 5 / 7
Exhibit9: Valuation looks attractivefor A-share’s Blue-chip Companies
Source: ChinaAMC, Wind as of Mar31, 2016
The market liberalization is inevitable also irreversible
China’s capital market liberalization is already underway regardless of the inclusion. Global investors have
already come to the consensus that, China, the world’s second largest economy shall not be the missing
piece in their policy portfolio. During the first half of 2016, large institutional investors have readied
themselves. Vanguard and Blackrock have received 30 and 20 Billion of RQFII quotas from Australia and
Singapore respectively. In June, a RQFII quota of 250 Billion RMB, approximately 50% of the total existing
quotas, has been granted to the United States.
β or α, InclusionHas Something To Offer For Both
Based on the constituent selection methodology of MSCI EM index, it is not difficult to tell that large-cap
and blue chip names have the best propensity to be included.
For investors seeking β exposure, ChinaAMC’s MSCI China A ETF (512990) and its feeder fund (000975) are
the first and only ETF in the domestic market tracking MSCI China A index. It is the ideal instrument for
capturing the inclusion opportunity. (Exhibit 10) For investors seeking alternative large cap exposure,
ChinaAMC also manages a series of large cap index ETF such as its flagship China50 ETF and CSI 300 ETF.
(Exhibit 11)
Exhibit10: ChinaAMC MSCI China AETF
Source: ChinaAMC

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Exhibit11: Performanceofmajor ChinaAMC A-share index ETFs
12 Months ending 2016Q1 Ticker
Tracking
Difference(Daily)
Tracking Error
(Daily)
Tracking Error
(Annualized)
Excess Return
ChinaAMC MSCI China AETF 512990 0.10% 0.10% 1.50% 2.70%
ChinaAMC China50ETF 510050 0.04% 0.00% 0.70% 3.20%
ChinaAMC 300ETF 510330 0.10% 0.10% 1.20% 2.60%
Source: ChinaAMC
For investors seeking α, ChinaAMC‘s active equity VPS (Value-Payout-Sustainability) Strategy might just be
what they are looking for.
This strategy utilizes a quantitative screening to perform an initial scan of the 2800+ names in the A-share
market and then applies ChinaAMC’s cutting edge fundamental research capabilities to select the most
fundamentally sound names. No doubt, this strategy also takes into account of the propensity to benefit
from the inclusion, and hence it is large to mid cap oriented. The portfolio would be a high conviction one,
with concentrated holdings.
Contrary to most investor’s belief that China A-shares are all about growth, this strategy focuses on value,
both from a valuation standpoint and the company’s ability to pay cash dividends. The resulting portfolio
offers comparable if not lower valuation (P/E) than the MSCI China A index, but significantly higher dividend
yield and earnings growththan that of the index. (Exhibit 12)
Exhibit12: ChinaAMC VPS Portfoliohas better dividend and valuationprofilethan theCSI 300 index and MSCIChina Aindex
Source: ChinaAMC

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