(Yicai Global) June 14 – This year will mark the fourth time China has battled to get its A-shares into the MSCI Emerging Markets Index.
MSCI Inc. [NYSE:MSCI] will release the results of its annual market classification on June 21, which will be uploaded to its website after 4.30 a.m. Beijing time. Two media conference calls will be held at 7.00 a.m. and 3.00 p.m., chaired by Sebastien Lieblich, MSCI's global head of index management research.
At the beginning of this year, based on the Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect, MSCI proposed a new scheme for A-shares to be listed in the index, eliminating foreign institutions' concerns about an A-share redemption limit. TF Securities expects that, if the new scheme is approved, the inclusion ratio of 5 percent will see about CNY65.7 billion (USD9.67 billion) flowing into the A-share market.
On March 25, Fang Xinghai, vice chairman of the China Securities Regulatory Commission said that he is cautiously optimistic about the A-share entering the index. Industry analysts believe the reason for optimism is the share redemption restrictions being eased this year. However, some external investors' core issues have not been fully addressed, such as a pre-approval system for financial products.
Yicai Global recently interviewed a number of foreign funds and found that many of their expectations were significantly higher than last year.
"The likelihood that MSCI will incorporate A-shares this year is extremely high," said Miao Zimei, chief investment officer at Robeco China. "It's much higher than the last few years. The inclusion of A-shares would strengthen the integrity of MSCI. It is already the world's second-largest stock market, with a market cap of about USD7 trillion and making up 10 percent of the value of the world's total."
Last June, when MSCI announced it would not include A-shares in the emerging markets index, it raised three issues of concern for international investors.
The first was to improve policy for qualified foreign investors by canceling the 20 percent monthly redemption limit. The second was to improve regulation of the suspension system, and the third was to improve the pre-approval limit of A-share related financial products. On a whole, international investors are concerned about the freedom of capital and to use the products available.
Problems Have Been Repaired
With the opening of the Shenzhen-Hong Kong Stock Connect in 2016, international investors were able to handle 1,480 stocks in Shenzhen and Shanghai, without quotas or a need for permits. Although the Shenzhen and Shanghai-Hong Kong stock connects have a daily investment quota limit, the total amount is not limited and the daily quota gives almost free access to foreign capital.
In addition, the suspension system is also being improved. New regulations came into play in May 2016, TF Securities said, adding that there are notably fewer companies with trading suspended than before that time.
MSCI is also working with domestic exchanges to agree to release the requirements of A-share stock and associated financial products.
An Improved Success Rate
As well as resolving international investors' concerns, the possibility of the A-share being included in the index could be increased greatly under a new MSCI plan.
The new proposal only incorporates large-cap stocks that can be traded through the Shanghai and Shenzhen exchanges, excluding the shares of listed companies that are already in the MSCI China Index and those that have been suspended for more than 50 days. The new plan reduces the number of shares likely to be index to 169.
If the A-share is successfully incorporated, its weight in the MSCI China and MSCI Emerging Markets indices would be 1.7 percent and 0.5 percent respectively, MSCI forecast, following initial values of 3.7 percent and 1 percent.
At present, qualified international investors cannot redeem more than 20 percent of their previous year's net asset value, which impedes investors' liquidity. Last year, MSCI insiders said these restrictions and large-scale suspension were the main reasons hindering the A-shares introduction to MSCI. Under the new arrangement, foreign institutions won't be limited to the 20-percent quota.
A disadvantage of the new scheme is that the shares an investor can acquire are limited, they can't buy all A-shares, said Zhang Yu, head of overseas research at Minsheng Securities.
However, she added, considering the A-share was initially mostly for blue-chip companies, the real impact of this disadvantage is limited. Another concern is the "the new scheme uses the offshore yuan as an index currency, whereas the old one used onshore rates," she said. "Factoring in that the current offshore pool is small and more volatile, there's more risk."
A-Shares Will Keep Moving Forward
Under the new scheme, although the inflow into A-share funds will be lowered, the general consensus is that it is an important step for A-shares to catch up with the international market.
"China will keep opening its markets," said Qi Bin, deputy general manager of China Investment Co., "MSCI is just one channel, and where or not A-shares are including, China's reform and opening-up will plow on." Qi previously said the Chinese market can learn from overseas markets in many ways. For example, the London exchange's cooperation with other markets is particularly effective, and China can learn from this collaboration.
For MSCI, the inclusion of the A-share is an important step in ensuring the integrity and representativeness of the index, said Ajay Dayal, an investment director at Legg Mason Global Asset Management. "MSCI is bound to include it in the long term, and that's their responsibility. In May 2015, the FTSE Index launched a plan to incorporate A-shares into its global transition index, introducing two emerging market transition indices that include the A-share. However, the inclusion is not the focus. The A-share's internationalization is what's key."
The mainstream view is that the incremental funds brought to the A-share market are not the main issue; the real positive is that an important step has been made in the domestic capital market and its integration with the global financial market. An open, market-oriented, standardized and speculative stock market can provide more powerful support for a real economic transformation.