China's Regulators Moved Fast to Ensure A-Shares Get Added to MSCI Index
Yicai Global
/SOURCE : Yicai
China's Regulators Moved Fast to Ensure A-Shares Get Added to MSCI Index

(Yicai Global) June 1 -- Mainland-traded Chinese stocks, commonly referred to as A-shares, staged a long-awaited rally amid high trading volume on the last day of May. Was it a sign these equities may be added to MSCI Inc.'s benchmark Emerging Markets Index? We will know the answer on June 15.

In an emailed reply to Yicai, New York-based MSCI said it would be holding a press conference on whether A-shares are to be included in the index. The time and place have yet to be announced.

On June 9 last year, MSCI announced that A-shares would not be included in its Emerging Markets Index, for the time being. The fact that MSCI intends to hold a formal press conference, suggests A-shares stand a much better chance of being included in the index this time around. China's regulatory authorities have also removed three major 'obstacles' to their inclusion.

First of all, foreign investors hope they will be allocated investment quotas according to the size of their assets.

In this respect, on Feb. 3 the State Administration of Foreign Exchange (SAFE) issued a document titled 'Regulations Concerning Foreign Exchange Administration for Qualified Foreign Institutional Investors Investing in Chinese Securities.' These regulations remove the USD1 billion limit on Qualified Foreign Institutional Investors. Instead, investment quotas will be calculated on the basis of basic and additional quotas; quotas up to USD5 billion assigned to QFIIs and RQFIIs (Renminbi Qualified Foreign Institutional Investors will be automatically determined according to their assets under management. QFIIs and RQFIIs may request additional quotas from SAFE without any special restrictions.

Secondly, SAFE also lifted restrictions on capital liquidity. So far, open-end funds are allowed to pay funds in or out every day, and the principal lock-in period has been shortened from one year to three months. Furthermore, with the expected launch of the Shenzhen-Hong Kong Stock Connect program on July 1, the daily cap of CNY13 billion (USD1.97 billion) on the program may also be increased to better satisfy the demands of international investors.

Thirdly, the China Securities Regulatory Commission has amended securities trading rules to bring them into line with established international practice. That means all three major barriers to the addition of A-shares in the MSCI Emerging Markets Index have been removed.

However, MSCI raised two new issues for the A-share market during its April market inquiry: A-share companies should be prohibited from actively suspending share trading, and anti-competitive clauses must be added to A-share rules.

The CSRC responded actively. On May 27, the Shanghai and Shenzhen stock exchanges jointly issued new rules for trading suspensions and resumptions, introducing strict time limits on both, with fine-tuned procedural requirements for information disclosure and suspension extensions for suspended stocks. The aim of these measures is to facilitate the inclusion of A-shares in MSCI index.

In addition, operations (including listing on overseas markets) relating to A-share-related financial products (including exchange-traded funds) are subject to prior approval by Chinese stock exchanges under the country's anti-competition rules.

Bearing this all in mind, all obstacles to the inclusion of A-shares in the MSCI index have already been removed.

A CITIC Securities analyst has pointed out that the valuations of A-shares have returned to reasonable levels after several corrections since the second half of last year, meaning that they stand a 60 percent chance of being added to the benchmark.

The 155 underlying stocks in the MSCI China Index include H-shares, red chips, P-shares (mainland private companies listed in Hong Kong), B-shares and China concept stocks. A-shares are the only type of equity missing from the list.

"MSCI indexes are the benchmark indexes most commonly adopted by portfolio managers around the globe," according to CITIC Securities. "To include A-shares in MSCI indexes would be the final step to 'unifying the Chinese markets'".

MSCI estimates that the addition of A-shares would attract USD20 billion to the Chinese market in the short term, and the number could increase to USD400 billion over time.

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