MSCI heeds investor calls against inclusion of A shares in indices
Index provider says they will not be included in its China and emerging market indices following investor concerns over controversial proposal
MSCI yesterday announced that it will not include A shares in its China and emerging markets indices, after howls of protest from investors against the proposal.
Remy Briand, MSCI's global head of index research, said investors uniformly opposed inclusion of yuan-denominated A shares in the indices. "The only difference in perspective would be, as expected, [from] managers in mainland China. Otherwise the feedback was consistent [in opposing A-share inclusion]," said Briand.
The A-share market yesterday hardly moved on the news. The CSI 300 Index edged down 0.02 per cent, indicating investors had already priced in the decision.
MSCI first proposed including A shares in its indices in June last year as it was felt that widening liberalisation and the sheer size of the mainland market were compelling reasons to include mainland stocks in its indices.
A formal market consultation was launched in March this year to gauge investor response.
MSCI noted at the time that total authorised quota for the mainland's qualified foreign institutional investor scheme (QFII) and its yuan-denominated equivalent, or RQFII, has reached US$216 billion. The authorities have also expanded the RQFII scheme from Hong Kong to London, Taiwan, Singapore and Paris, and there are now more than 300 offshore institutions with permission to invest in mainland China.
Most significantly, in the middle of the consultation, on April 14, authorities announced the Shanghai-Hong Kong stocks through train that will allow Hong Kong and mainland investors to cross-trade shares. This plan will let offshore investors own A shares without the need for a licence or quota for the first time.
But offshore investors felt the mainland market is still too limited to be included in global indices. For example, QFII caps institutions at a maximum investment of US$1 billion. QFII investors are only able to move funds into and out of the mainland once a week. There is also continued uncertainty on whether QFII investors need to pay capital gains tax on the mainland.
For various practical reasons it is also difficult to use multiple brokers when trading equities on the mainland, which makes it difficult for investors to get the best price for stocks.
The authorities restrict investors from placing large orders at the close of a trading day, on the view that this could distort the market. But institutions that track an index typically do much of their trading at the end of the day as they seek to replicate the index close - as opposed to intraday levels.
"All the three schemes - QFII, RQFII and through train - have pros and cons. QFII has unresolved issues around withholding tax … and there are a lot of repatriation restrictions. RQFII has currency risks and most of the investment has gone into fixed income. The through train excludes the Shenzhen market, so it's not perfect at all," said Alan Wang, investment director of Value Partners.
Chin Ping Chia, MSCI's Asia-Pacific head of research, said: "The feedback was that investors welcomed the inclusion of A shares at a certain point in time but … they felt the QFII and RQFII schemes were too restrictive."
Had MSCI opted to include A shares, the adjustment could have been enormous. Some US$1.5 trillion is invested in funds that reference the MSCI Emerging Markets Index alone. If the A-share market were fully liberalised, it would eventually comprise 10 per cent of that index, MSCI estimated.