When they are finally included in MSCI's emerging market index, China A-shares could account for a far bigger weighting than currently anticipated if the Hong Kong-Shanghai Stock Connect is successful, says the index provider’s Asia head of research.
“That is a new development for us,” Chia Chin-Ping told AsianInvestor yesterday following the release of the index provider’s annual review that left mainland stocks outside the scope of the influential benchmark for at least another year.
“The proposal we brought to the market factors in the existing renminbi-denominated qualified institutional investor [RQFII] and QFII schemes, but not Connect, which would provide full access.” (The RQFII/QFII schemes allow only entities with awarded quota to buy mainland securities.)
Fund managers are already anticipating China’s ascent to EM status and Connect’s implementation, though many of the scheme’s details have yet to be released.
Last June, MSCI included China on its list for consideration in its EM index. Its proposal for inclusion would start A-shares at a 5% weighting.
The country’s representation in the index currently comprises companies listed overseas and B-shares listed domestically. Had the country made the grade, it would have marked the first inclusion of A-shares in a global benchmark.
Deutsche Bank estimates the proposed 5% weighting in the EM index could attract inflow of more than $7 billion to the A-share market.
“Even at the initial stage, 2% would mean a lot for international investors,” said Michael Chiu, investor director for equities at HSBC Global Asset Management, who manages the firm’s $600 million QFII quota. “They can’t choose to ignore that.”
He was speaking earlier this week at the Greater China Forum hosted by the London Stock Exchange in association with AsianInvestor.
Despite recent Chinese financial reforms, stumbling blocks to EM status remain. The main ones are restrictions on trading and capital mobility and uncertainty surrounding capital gains tax (CGT), according to investors surveyed by MSCI.
The country’s cumbersome quota application process and the uncertainty of additional quota shackles investors, MSCI said. Capital remittance and lock-up periods were also cited by investors as limiting flexibility. The repatriation of capital is also viewed as problematic.
Though still a pilot scheme, Connect has the potential to solve some of these issues.
For example, China is likely to address the tax issue ahead of Connect’s launch, said Chiu. “It’s not like the QFII and RQFII schemes,” he noted. “You don’t have the legacy problem where you have a lot of historical CGT that you don’t know what to do with. Connect is brand new and gives the regulator the opportunity to think about these questions.”
The index provider will review the country’s inclusion again next year in May.
Meanwhile, last week MSCI rival FTSE announced a new range of China A-share indices. The FTSE Global R/QFII Index series marks the debut of A-shares in the UK firm’s index range. FTSE does not currently include A-shares in its standard global benchmarks, which it reviews every September.
Taiwan and Korea relegated
In a further negative move for Asian prospects as regards MSCI’s benchmarks, Taiwan and Korea were relegated from the list of countries considered for inclusion in developed market (DM) indices.
Though the two met many DM criteria, MSCI said very little progress had been made over the past year on addressing currency mobility and reforming market microstructures.
“These important issues that concern investors have been on the list for the past four to five years,” said Chia. “The views of international investors have been remarkably consistent. “
“The ball is in the regulators’ court,” he added. “If they want to move the markets into the other category, they need to think about how to resolve the issues and align their standards with international standards."