Update | Why China failed in its third try to join the MSCI club

Stock index provider MSCI would not be including Chinese A shares in its Emerging Markets Index, it said on Wednesday. Officially, the company said there will be no inclusions until China makes “significant positive improvements” to its market accessibility ahead of the next index review in June 2017. It is the third time since 2014 that the decision has gone against the A shares. And, as the dust settles, analysts are now pinpointing three overarching reasons for the failure this time around, all of which are largely centred on the restrictions still in place for launching Chinese financial products overseas, and liquidity. First, limits on the launch of A-share-linked financial products. MSCI actually listed five major obstacles that still needed addressing since last June: “the quota allocation process”, “capital mobility restrictions”, “beneficial ownership”, “widespread voluntary suspension”, and “pre-approval requirements imposed by stock exchanges”. Of those, MSCI said it considers the last as remaining totally unaddressed, given that if foreign institutions want to launch any investment products overseas linked to A shares, such as ETFs and derivatives, they still need pre-approval from the Shanghai and Shenzhen exchanges. The restriction is “problematic”, said Chin Ping Chia, managing director and head of research for Asia Pacific at MSCI, during a conference call on Wednesday afternoon. “If [it is] not addressed, MSCI will not be conditioned to put A shares in the emerging market index,” he said. There will be no inclusions until China makes ‘significant positive improvements’ to its market accessibility MSCI statement, on including A shares in its Emerging Markets Index Second, voluntary trading suspensions. This refers to the wave of trading halts that took place during the stock market turmoil a year ago. At that time, more than half of all listed Chinese companies, or some 1,400 firms, suspended their shares, putting huge strain on market liquidity and actually worsening volatility, many agree. On May 27, the Shanghai and Shenzhen stock exchanges published separate detailed guidelines on curbing voluntary stock suspensions, stating that companies must provide proper reasons and submit necessary documents to support their claims. Nevertheless, investors are still demanding “greater clarity” of the rules, and say they need more time to “assess the effectiveness” of the policy changes, MSCI said in its statement. “We recognise it’s a new policy. We need time to observe [the impact],” Chin said. “What global investors want to see under the new rules is that fewer companies are to be suspended. Otherwise they will have problems getting in and out of the [Chinese] markets.” Third, capital outflow concerns. According to China’s current rules, the qualified foreign institutional investor programme (QFII) allows investors to buy RMB-denominated A shares in the Shanghai and Shenzhen stock exchanges. However, monthly repatriation of funds by global institutional investors cannot exceed 20 per cent of their investment at the end of the preceding year. “We hope to see that [the Chinese authorities] remove the 20 per cent monthly repatriation limit, which affects the liquidity [of foreign funds],” Chin said. “That limit remains a major road block for international investors, in particular mutual funds that could face redemptions,” said Ronald Wan, chief executive for Hong Kong-based Partners Capital International. MSCI claimed on Tuesday in New York that most investors still view the 20 per cent limit as “problematic”, and the issue must be “satisfactorily addressed”. In early February, the State Administration of Foreign Exchange (SAFE), China’s foreign exchange regulator, announced that fund managers no longer needed to apply for investment quotas in the QFII system, but instead can operate a new scheme linked to the size of assets under management. The ceiling of the new quota has also been increased to US$5 billion, compared with US$1 billion previously. The regulator now permits QFII funds to pull money out of China after three months, instead of the previous one year. And the repatriation frequency for QFII has also been shortened to daily. In its statement, MSCI said investors still needed “more time” to assess the effectiveness of recent policy changes regarding the “quota allocation process” and “capital mobility restrictions”. In general, the index compiler said only “beneficial ownership” has been resolved “satisfactorily” among those five highlighted concerns. The Chinese government clarified its stance in May on the beneficial ownership of securities through nominee holders, addressing some investor concerns by recognising the rights and interests of beneficial owners of securities, including the clients or investors of the qualified foreign funds. Despite SAFE’s February announcement on those changes, Dai Kang from Huatai Securities said: “MSCI and its clients are still very cautious about investing in Chinese markets. “The liquidity issue and restrictions on investment strategy have left them incapable of resisting redemption pressure. “This is the major reason why China failed.”

.css-sioo19{color:#c79a00;}Update | Why China failed in its third try to join the MSCI club

.css-1c6uqr6{color:inherit;font-weight:inherit;font-size:inherit;font-family:inherit;line-height:inherit;overflow-wrap:break-word;}Analysts suggest the latest rejection is largely down to the restrictions still in place on the launch of Chinese financial products overseas, and liquidity.

Update | Why China failed in its third try to join the MSCI club

Analysts suggest the latest rejection is largely down to the restrictions still in place on the launch of Chinese financial products overseas, and liquidity.