MSCI rejects adding China A-shares to leading indices for third year in a row
Setback for the internationalisation of RMB but may lead to more reforms, analysts say
Global share index compiler MSCI said it would not include China’s yuan-denominated A-shares in its emerging market indices, dealing a blow to hopes huge flows of money which could give the poorly performing index in the main Shanghai equity market a lift.
This is the third straight year that MSCI has rejected A-shares, after reviews in 2014 and 2015 had cited limited foreign access and a lack of transparency in the market. The next review will be in 2017.
“There have been significant steps toward the eventual inclusion of China A shares in the MSCI
Emerging Markets Index,” said Remy Briand, MSCI Managing Director and Global Head of Research.
“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. In keeping with its standard practice, MSCI will monitor the implementation of the recently announced policy changes and will seek feedback from market participants,” he added.
Joseph Tong, chairman of Morton Securities, said rejection was not surprising, noting that stock markets in Hong Kong and Shanghai had fallen sharply in the first two days of this week, indicating that investors did not expect an inclusion. He said the Hong Kong and mainland stock markets may fall further on Wednesday after the news.
“Foreign investors still face a lot of restrictions in the A-share market. Many fund managers found it hard to sell stocks during the market rout last summer. In addition, the Shenzhen and Hong Kong stock connect scheme does not yet have a launch timetable,” Tong said.
“An MSCI rejection may help to encourage Beijing to continue its reform plans to open up its capital market further, to seek inclusion in the next review,” he said.
Keith Pogson, a senior partner of EY Asia-Pacific financial services, said another MSCI rejection would be frustrating for the mainland in its journey towards RMB internationalisation and recognition of China’s place in global capital markets.
“However, China would still have a number of weapons left in its arsenal, including Shenzhen connect, expansion of the Shanghai connect and maybe other ‘connects’, ahead of a full opening,” Pogson said.
HSBC had estimated in a report that inclusion would bring at least US$30 billion into the A-share market, while others had expected the inflow to reach US$400 billion in the long term. That would have been a boost for a market that has lost 20 per cent so far this year and is down 45 per cent from a seven-year peak a year ago.
The MSCI Emerging Markets Index is tracked by roughly US$1.7 trillion of assets from fund managers, pension funds and major investors worldwide. The rejection would be seen as a signal that China, despite being the world’s second-largest economy, has yet to meet the standards required by international investors.
MSCI said the 20 per cent monthly repatriation limit remains “a significant hurdle for investors that may be faced with redemptions such as mutual funds and must be satisfactorily addressed.”
Also, “the local exchanges’ pre-approval restrictions on launching financial products remain unaddressed,” it added.
MSCI said it will retain the China A shares inclusion proposal as part of the 2017 Market Classification Review. MSCI does not rule out a potential off-cycle announcement should further significant positive developments occur ahead of June 2017.
“China has made some good steps and should be encouraged on its journey. For us in Hong Kong, if the A-shares are not included, it would be a short-term setback and markets at the moment could do with some good news,” Pogson said.
Sean Taylor, managing director and chief investment officer for the Asian Pacific region at Deutsche Asset Management, believed China should do more on two outstanding issues previously highlighted by MSCI, capital mobility restrictions and anti-competitive clauses.
Andrew Fung, executive director of Hang Seng Bank, said that with the sheer size of the market and China’s economic influence, it was only a matter of time before A-shares would be included in MSCI indices.
Other analysts said Chinese market authorities should be more transparent and timely with announcements if they want to see A-shares included in MSCI indices.
“We still don’t have a firm date for the Shenzhen and Hong Kong stock connect scheme, and it took the Chinese stock exchanges quite some time to finally set the upper time limit for listed firms’ trading suspensions,” said Ken Wong, Asia equity portfolio specialist at Eastspring Investments.
“Providing more certainty and better guidance would be something that could only help China’s cause,” he added.