The MSCI, a leading provider of global equity indexes, announced late Tuesday that it decided to exclude mainland Chinese shares in its latest benchmark emerging markets index review, seemingly pushing back the inclusion of A-shares until its next review in mid-2017.
According to analysis from the Financial Times, an estimated US$1.5 trillion in funds is benchmarked to the MSCI’s emerging markets index.
While Chinese shares already account for 26.8% of the index due to the inclusion of Chinese firms listed in offshore markets such as Hong Kong, a full inclusion of mainland shares on this occasion would have seen its allocation to Chinese shares jump to 39% according to the FT, leading to around US$180 billion of A-share purchases by fund managers who track the index.
While such a move was seen as unlikely during the current review, some analysts were expecting the MSCI to allocate a 1.1% weighting for mainland Chinese shares within its benchmark index.
While the MSCI decided against any allocation of A-shares at this review, the group noted they are getting “closer and closer to an inclusion”.
“There have been significant steps toward the eventual inclusion of China A shares in the MSCI Emerging Markets Index,” said Remy Briand, managing director and global head of research at the MSCI.
“They demonstrate a clear commitment by the Chinese authorities to bring the accessibility of the China A shares market closer to international standards. We look forward to the continuation of policy momentum in addressing the remaining accessibility issues.
“International institutional investors clearly indicated that they would like to see further improvements in the accessibility of the China A shares market before its inclusion in the MSCI Emerging Markets Index. In keeping with its standard practice, MSCI will monitor the implementation of the recently announced policy changes and will seek feedback from market participants.”
Here is a snippet from the MSCI’s press release explaining the decision to exclude A-shares into its emerging markets index on this occasion.
Investors recognized the actions taken to further open the China A shares market and highlighted that the topic of beneficial ownership has been satisfactorily resolved. They generally stressed the need for a period of observation to assess the effectiveness of the QFII quota allocation and capital mobility policy changes as well as the effectiveness of the new trading suspension policies.
The 20% monthly repatriation limit remains a significant hurdle for investors that may be faced with redemptions such as mutual funds and must be satisfactorily addressed. Finally, the local exchanges’ pre-approval restrictions on launching financial products remain unaddressed.
The MSCI acknowledged that it will review its decision to include A-shares into its emerging markets index when its 2017 review is announced in June next year, adding that it would not rule out a potential off-cycle announcement should further significant positive developments occur ahead of the next review date.
While the decision will no doubt disappoint some investors who were hoping that A-shares would have been admitted on this occasion, not everyone disagrees with the delay, pointing out that it may actually herald further reforms to Chinese markets.
“This could be a good thing, because it gives China incentive to push reforms through further rather than give them the benefit of the doubt,” Lucy Qiu, emerging market strategist at UBS Wealth Management, told CNBC.
“Chinese authorities have been trying to attract capital in, but restricting outflows, and this (repatriation limit) is capital restriction out. That does deter a lot of foreign investors,” said Qiu. “If the global environment remains benign and the currency depreciation remains gradual, they could actually consider relaxing it.”