(Yicai Global) June 22 -- China Securities Regulatory Commission (CSRC) Vice Chairman Fang Xinghai revealed details of negotiations held with MSCI Inc. [NYSE:MSCI] in a CCTV interview after the index provider announced on its official website yesterday that it will include China's A-shares in the MSCI Emerging Markets Index and the MSCI ACWI Index.
Fang said he headed the talks between two stock exchanges and MSCI. "This work was personally guided by Chairman Liu Shiyu," Fang said. "I asked him for instructions when there was a problem. If it could be solved on the spot, he would deal with it immediately. If not, he would report to the State Council. Zhou Xiaochuan, governor of the People's Bank of China, and Guo Shuqing, chairman of China Banking Regulatory Commission (CBRC), also played positive roles in MSCI's decision to include China's A-shares."
Two important factors contributed to the inclusion of China's A-shares, Fang said. "One was investment -- making sure foreign capital can come and go easily," he said. "The other was preapproval restrictions on derivatives, which MSCI had repeatedly mentioned. MSCI's concern was whether the launch of derivatives related to A-shares by foreign markets required preapproval from Chinese regulators."
The CSRC's negotiations with MSCI on the second issue were protracted. The regulator would not budge on two points -- the introduction of derivatives cannot disturb China's A-share market and the liquidity of important derivatives shall stay on the domestic market. The rollout of the Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect programs resolved investment availability issues and negotiations addressed overseas investors' risk management concerns.
MSCI had planned to incorporate 230 A-share stocks and reduced the number after several securities met trading suspensions, Fang said. After the inclusion of A-shares, the regulator will reduce suspensions, which will make companies behave more regularly and promote reform and development, he said.
The inclusion of A-shares in the MSCI Emerging Markets Index will propagate the development of derivative product markets as well as the yuan's internationalization, Fang said. Of course, there will also be challenges, he said.
The Shanghai-Hong Kong Stock Connect and the Shenzhen-Hong Kong Stock Connect each have a USD1.9 billion (CNY13 billion) daily quota that has not been exhausted. If MSCI adds more securities on top of the 222 slated for inclusion, the CSRC may need to adjust the limits, modify the quota in the Qualified Foreign Institutional Investors Scheme to pave the way for overseas investors, or change regulations, Fang said. Bringing on long-term funds is a good thing and will benefit A-shares, he said.
China's stock exchanges will get closer to international investors and list top-notch Chinese firms, and maybe even attract foreign companies to go public in China, he said.