China managers pressure MSCI on A-shares

In the first of two articles on MSCI’s decision on including A-shares in its emerging-market indices, Chinese fund managers – and local media – argue that it should happen next month.
China managers pressure MSCI on A-shares

As index provider MSCI prepares to decide next month whether to include China A-shares in its emerging-market benchmarks, mainland fund managers – and domestic state media – have been making their feelings clear on the subject.

They argue that Beijing has done enough to address MSCI’s market-access concerns and that Chinese stocks should now be included, after failing to make the cut for the past two years.

Further delay will “increase the pain for investors” because the impact on investors of non-inclusion will become more dramatic as Chinese equity market capitalisation grows and more stocks are listed, said Wang Qi, a partner at Shanghai-based MegaTrust Investments. 

While many in the market, including Goldman Sachs, still estimate the likelihood of a June inclusion at 50/50, Wang puts it at 75%. He said recent reforms had addressed two key issues – investment quota allocations and capital mobility – which MSCI flagged last June as two of the three accessibility hurdles to be overcome.

Moreover, Yang Delong, executive general manager at Shenzhen-based First Seafront Fund, told AsianInvestor that five out of eight asset managers he met in New York last week said the inclusion would happen next month. 

Mainland managers said the QFII reforms in February represented a key step towards A-share inclusion. The State Administration of Foreign Exchange (Safe) said that QFII investors’ quota would be based on a percentage of their assets under management, rather than requiring them to apply in advance for quota. Safe also said it would allow capital repatriation on a daily rather than weekly basis for all QFII holders.

In addition, the Chinese securities regulator last Friday confirmed that fund managers' clients are the legal owners of securities in QFII and RQFII separate accounts. The need to clarify beneficial ownership had been the third hurdle mentioned by MSCI last year.   

A Shanghai-based private fund manager, who preferred to remain anonymous, said the changes were exactly what MSCI said last year that it wanted to see, indicating that China had made a lot of effort to facilitate the inclusion.

What's more, emerging markets cannot be expected to be perfect, he added. “If you want to find faults with the Chinese stock market, or any market, you can always find them.” 

Mainland state media has also weighed in. Xinhua News published a commentary on April 27, saying: “Too much hesitation serves nobody’s interests.” MSCI should not wait for “the perfect moment”, it added.

In any case, some of the biggest investors are already buying A-shares and including them in EM benchmarks, noted Wang, pointing to another reason why MSCI should make the move now. “If large passive fund managers can access this market, that means there are no fundamental problems with inclusion.” 

US index fund giant Vanguard has been buying A-shares for its global EM stock index fund since November. Moreover, BlackRock’s iShares and other fund houses, such as GF International and CSOP Asset Management, have launched ETFs tracking the MSCI China A International index, which is designed to provide with A-share exposure in investors’ MSCI global EM benchmarks.

Yet the fact remains that even if MSCI does not announce A-shares’ inclusion next month, the decision will not have to wait until next year’s review. The index provider said in May last year that it would allowing a flexible timetable in respect of mainland stocks, meaning inclusion could happen any time.

US and European asset managers are being less forthright with their opinions on the subject than their mainland peers.

A spokeswoman at Fidelity International said the firm was neutral as to A-share inclusion because its managers can access mainland stocks even though they are not included in global indices.

A BlackRock spokesman did not respond to a query about whether the firm expected to see the inclusion happen this year.

Schroder Investment Management's emerging-markets team declined to comment.

Tomorrow we will consider the arguments as to why A-shares are still not ready for inclusion in MSCI's EM benchmarks.  

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