The designation of the renminbi as a global reserve currency may give China more credibility in global financial markets, but it will not impact when mainland stocks will be included in MSCI’s influential emerging-market indices.
The International Monetary Fund said on Monday it would include the RMB in its special drawing rights (SDR) basket of global reserve currencies, alongside the dollar, euro, sterling and yen.
Fund managers said this week that the move will have a major, if gradual, impact on portfolios – but it is of little import for index provider MSCI’s decision-making on A-shares.
Chia Chin Ping, Asia head of research at MSCI, said: “I got plenty of questions this week, asking about any impact of the RMB SDR inclusion on the MSCI index inclusion. [But] it is a totally different [issue].”
The key question for A-share inclusion in MSCI’s global equity benchmark is accessibility – whether foreign investors are able to get in and out. The main issues under consideration are distribution of cross-border investment quotas and clarification of beneficial ownership, said Chia, speaking on a panel at AsianInvestor’s institutional investment forum in Singapore this week.
While resolving these two hurdles could put China’s capital market on the global stage, the inclusion of A-shares by MSCI will also require more soft reforms by the mainland, said Larry Cao, Asia-Pacific director of content at CFA Institute, who moderated the panel ‘Making Sense of China’s Economy’.
Chia noted: “It is still not that straightforward to buy A-shares; if you are a very small investor, it is not easy to get quota.” Despite there being multiple channels for accessing A-shares, he said there were still challenges in respect of accessibility.
MSCI decided not to include A-shares in its global emerging market index in its latest annual review in June, when it said it would form a working group with the Chinese securities regulator to accelerate the process. However, the market volatility and subsequent government intervention this summer could dampen global investors’ appetite for A-shares, although they do not directly affect MSCI’s thinking.
Other speakers at the forum said that the SDR inclusion would not have an immediate impact on China’s financial markets or MSCI index inclusion but agreed it gave China more credibility.
In May MSCI offered China a flexible timetable over the A-share inclusion, suggesting it may not have to wait until its annual review in June every year. The firm’s Asia head, Chris Ryan, said in June that he expected this to happen by May 2017, as reported.
Ultimately, it's all about credibility, said Leo Hu, senior portfolio manager of emerging market debt (hard currency) at NN Investment Partners, speaking on another panel. “For emerging markets, people normally do not have confidence.That’s why China wants to make sure the renminbi is a reserve currency, to establish credibility for the central bank.”