Chinese shares in MSCI: What’s the big deal?
If Beijing wants to be seen as a new global leader on free trade, it should start by meeting well-established international market standards
After much ado, this year could well see Chinese domestic A shares included in the broadly followed MSCI Emerging Market Index – but don’t expect the financial equivalent of a victory parade.
Instead, after a formal announcement expected in June, both Chinese authorities and the MSCI will likely want to move on quickly from the saga – once marketed as a sign of China’s economic rise and now widely thought to be a lesson in the very real limitations of financial reforms in China.
MSCI, which is used by 97 out of 100 of the world’s largest money managers, has worked with authorities for years to include Chinese A shares. What concerns MSCI about Beijing is its true commitment to free trade, how easily it allows money to move in and out of the country, and the veto it has over any product using A shares as a reference price – an effort to control how much offshore products can affect its domestic market.
Whether A shares rise or fall isn’t the issue; index followers need to know that they can rebalance their baskets, that they have the capacity to invest more funds into China and, when they have redemptions, they need to be able to get their money out.
Why you shouldn’t believe the horror stories about China’s economy
Almost all other Asian markets have satisfied these concerns, but 14 years after introducing the first institutional access to A shares via the Qualified Foreign Institutional Investors (QFII) facility, China still has not been able to meet the criteria. Last year, the China Securities Regulatory Commission (CSRC) introduced rules to handle suspended stocks, but not much has changed – there appears to be little will to either get those stocks trading again or delist them.