MSCI warns against prolonged trading suspensions of mainland Chinese A-shares

Global equity index compiler MSCI said it will remove from its widely tracked Emerging Market Index (EMI) any mainland Chinese A shares that are suspended from trading for more than 50 days.

The warning comes less than two months after it decided to add 222 A-share stocks to the benchmark.

“If we find a company suspends for a long time, over 50 days, we will remove it from the index, and we will not bring it back to the index again for at least another 12 months,” Chia Chin Ping, MSCI’s head of research for Asia Pacific, said on Monday.

The 12-month removal rule would be limited to Chinese firms. Companies from other markets that are removed from the index due to a long suspension of trading would be able to start a review process for reinclusion once they resumed trading, Chia said.

Chinese companies need to wait longer for the reinclusion because “the trading suspension of China companies is more widespread and lengthy in duration compared to other markets”, said Chia. “The 12-month rule is applied to ensure that the index maintains a high level of investability and minimises the impact of suspension on global investors’ portfolio. We hope it will also help send a signal to companies so they realise there is a cost associated with prolonged suspension. The proposal was widely supported by global investors,” he said.

MSCI’s comments come at a time when the number of suspended stocks in China is at its highest level in a year.

An average of 265 listed companies in China, or one in every 13, suspended trading in July, Reuters reported last week, quoting data provided by the fund consultancy Z-Ben Advisors. The consultancy said the number had risen every month this year and was now up 30 per cent from an average of 202 in January.

More than 10 companies have been under trading suspension for more than five months, although the China Securities Regulatory Commission (CSRC) capped trading suspensions at three months in principal when it revised rules for trading suspension and resumption last September.

“The number of companies under trading suspension has largely come down, by 20 per cent compared to that of 2015... after new rules were introduced [last September],” Chang Depeng, a CSRC spokesman, said at a press conference in Beijing on Friday.

“More than 90 per cent of asset restructuring-related trading halts are within three months now, stabilising market expectations,” he said.

Chang said the CSRC would continue improving rules, urging China’s stock exchanges to strengthen oversight of trading halts to ensure smooth trading and adequate liquidity in the market.

Abuse of the trading suspension system had been a major hurdle that blocked China’s US$7 trillion equity market from joiningthe MSCI index, as investors worried about liquidity and information transparency. MSCI rejected A shares from its emerging markets index on three occasions in previous reviews.