Abacus | Why China’s MSCI breakthrough is the most important non-event of the year
Inclusion in MSCI’s emerging markets index puts an international seal of approval on China’s onshore A-share markets – but caveats in the deal make it mostly symbolic
Last week saw what may well turn out to be the most important non-event of the year. If that sounds like a contradiction in terms, it is. The announcement by index compiler MSCI that from next year it will begin to include China’s onshore stock markets in its benchmark equity indices is of great symbolic significance. But for years to come, the practical impact of the move will be negligible. Certainly it will fail to trigger the massive fund inflows and resulting stock market boom that some bullish analysts are forecasting.
Inclusion in MSCI’s emerging markets index is a big deal for Beijing, because it puts an international seal of approval on China’s onshore A-share markets. With investment portfolios worth around US$1.7 trillion benchmarked against the index, it has long rankled Chinese officials that their US$7.7 trillion domestic stock market has been omitted, especially when the shares of mainland companies listed in Hong Kong have been included for more than 20 years.
But for years MSCI and the big institutional investors who use its indices have rejected Chinese requests for inclusion. If A-shares were in MSCI’s indices, then institutions benchmarked against them would be obliged to buy mainland-listed stocks. But until now, problems with the mainland’s financial regulations have always put them off.
International investors’ complaints have included three main bones of contention: the high proportion of stock suspensions in the A-share market; mainland limits on the funds qualified foreign institutional investors can repatriate; and China’s requirement that mainland regulators must approve any structured investment products that include exposure to A-shares. The first could prevent investors selling in a market rout. The second restricts their ability to get their money out of China. And the third would give Chinese regulators theoretical jurisdiction over products such as exchange-traded funds based on MSCI’s indices – a requirement completely unacceptable both to MSCI and to big fund managers.
