Free the markets, and MSCI will come knocking on China’s door
Index complier has again rejected inclusion of A shares in its closely followed benchmarks; now it’s up to Beijing to bite the bullet and push through with long-promised reforms
China’s financial regulators were bitterly disappointed this week as global share index compiler MSCI again rejected the inclusion of domestic A shares in its emerging markets index. Coming as it did on the first anniversary of the mainland’s stock market crash last summer, the latest rejection after two previous attempts must have been especially humiliating.
The need to represent the A shares is obvious, as their market is now the world’s second largest by capitalisation, exceeding even that of Japan. This is why the China Securities Regulatory Commission insisted in a statement that any international stock index excluding A shares was “incomplete”. And yet, the statement added that the MSCI decision would not alter China’s “capital market opening-up and reform process”.
MSCI is right to reject the A shares again. Realising the importance of its decision, the New York-based company spells out in great details its rationale. If China insists on doing things its way, index inclusion will not happen any time soon.
Essentially, MSCI points out three major hurdles that concern capital controls.
First, foreign access to A shares remains restricted to narrow channels such as the Qualified Foreign Institutional Investor programme. Withdrawal is restricted to no more than 20 per cent of assets per month. Unless the restriction is lifted or increased significantly, it’s hard to see how China’s capital markets can meet international norms.
Second, the massive but ad hoc intervention by the authorities during last year’s market turmoil belies the lack of transparency and proper rules and regulations in China’s markets.
Even with the intervention, A shares have fallen about 45 per cent from early June last year.
Finally, China insists on the right to pre-approve all financial products linked to A shares in foreign markets. This is unique among emerging markets and irks foreign investors and regulators alike.
Despite significant improvements, China still imposes capital controls without sufficient transparency and rule-based behaviour or giving market forces enough free play.
If mainland markets are to be included in MSCI indexes and satisfy international norms, official bodies such as the securities commission must bite the bullet and push through with long-promised reforms.