(Yicai Global) June 15 -- Global index compiler MSCI Inc. has rejected including mainland-traded Chinese stocks, commonly referred to as A-shares, in its benchmark Emerging Markets Index for a third time.
"International institutional investors clearly indicated that they would like to see further improvements in the accessibility of the China A-shares market before its inclusion in the MSCI Emerging Markets Index," Mr. Remy Briand, MSCI's global head of research, said in a statement today.
The Emerging Markets Index has about USD1.5 trillion of assets benchmarked to it. Chinese officials have been pushing for the inclusion of A-shares, seeing it as another step in the assimilation of China into the global financial marketplace. MSCI has estimated that the addition of A-shares, or stocks traded in Shanghai and Shenzhen that are denominated in yuan, would attract USD20 billion to the Chinese market in the short term, and possibly USD400 billion over time.
MSCI said it would reconsider inclusion of A-shares as part of its market classification review next year, and does not rule out an earlier announcement "should further significant positive developments occur ahead of June 2017."
"MSCI will monitor the implementation of the recently announced policy changes and will seek feedback from market participants," Mr. Briand said.
The China Securities Regulatory Commission noted that MSCI will continue to review the inclusion of A-shares, it said in a statement. The CSRC pointed out that China is the world's second-largest economy and that the international influence of the A-shares market is growing. Any index that does not include A-shares is incomplete, the CSRC said. MSCI's decision will not influence the reform of China's capital markets, it said.
Chinese stocks now listed in the MSCI Emerging Market Index are all traded in either Hong Kong or the US. That means the world's second-largest economy makes up only about one-quarter of the index, while projected full inclusion of A-shares would bring that ratio to more than one-third. Asset managers, pension funds, insurers and individual investors hold passive investments like an exchange-traded fund (ETF) or mutual fund that track an MSCI index like emerging markets.
Last June, New York-based MSCI denied entry to the Chinese shares, citing uncertainty about who actually owns them and how easily investors can withdraw their money from Chinese investments. Earlier this year China's stock exchanges published rules that restrict arbitrary trading suspensions for Chinese stocks.
Dr. Qi Bin, an official with the China Securities Regulatory Commission, said improvements to the trading-halt system were part of government efforts to facilitate MSCI inclusion. He also cited freer money transfers allowed by the foreign exchange regulator and greater recognition of beneficiary ownership.
"There have been significant steps toward the eventual inclusion of China A shares in the MSCI Emerging Markets Index," Mr. Briand said.
MSCI said it gathered feedback from market participants on the potential inclusion of A-shares in the index. Investors recognized the actions taken to further open the A-shares market and highlighted that the topic of beneficial ownership has been satisfactorily resolved, MSCI said in its statement.
They generally stressed the need for a period of observation to assess the effectiveness of the Qualified Foreign Institutional Investor (QFII) quota allocation and capital mobility policy changes as well as the effectiveness of the new trading suspension policies.
"The 20 percent monthly repatriation limit remains a significant hurdle for investors that may be faced with redemptions such as mutual funds and must be satisfactorily addressed," MSCI said. "Finally, the local exchanges' pre-approval restrictions on launching financial products remain unaddressed."
In response to a question from Yicai Global about the 20 percent limit, Mr. Briand said the lower the restriction, the better. The best scenario would be for China to fully remove the limit, he said. He pointed out that MSCI cannot make that decision; it can only deliver that message to China's regulatory authorities.