Index provider MSCI has reiterated that China A-shares will not be included in its emerging-markets indices until China addresses foreign investors' concerns and complies fully with global standards.
At 5am Hong Kong time today MSCI announced the results of its annual review of which markets to include in its indices, which this year again saw admittance of A-shares as its key decision.
Over recent months, mainland authorities have made several improvements in the accessibility of A-shares by global investors. Despite this, MSCI said it would delay inclusion, though it is unlikely to be another year before inclusion takes place. The index provider has said it would be flexible in the decision timetable in the case of A-shares.
There have been significant steps toward the eventual inclusion of China A-shares in MSCI's EM becnhmarks, confirmed Remy Briand, MSCI’s global head of research. “We look forward to the continuation of policy momentum in addressing the remaining accessibility issues.”
He said international institutional investors had stressed the need for a period of observation to assess the effectiveness of the new QFII quota allocation process and capital mobility policy changes, as well as the effectiveness of new trading suspension policies. Concerns remain among foreign investors about the mainland stock-suspension mechanism, despite tightening of rules in late May in this area.
The 20% monthly repatriation limit also needs to be addressed, said Briand. It is a significant hurdle for asset managers facing redemptions from mutual fund, for instance. In addition, mainland exchanges’ requirements for acquiring pre-approval for launching financial products are still in place.
Meanwhile, in an April 25 research note, Goldman Sachs pointed to other reasons why China was not ready for A-share inclusion: the Shenzhen Connect stock-trading link has not yet launched; the limited amount of sell-side research coverage; a lack of hedging tools (both for equities and foreign exchange); high volatility; and high valuations.
A total of $1.5 trillion in assets ($0.2 trillion in passive funds and $1.3 trillion in active products) track MSCI EM indices. The plan is to include A-shares with a 1.1% weighting, which would bring $16 billion of inflows into mainland equities, according to Goldman Sachs.
The composition of the MSCI EM Index would be radically altered by the inclusion of A-shares, which would make up almost 40% of the global EM Index and more than 40% of MSCI Asia ex-Japan. As such, investors would need to assess whether they are suitably diversified in emerging markets, and whether an EM ex-China index would need to be considered.
After A-shares had failed to make the cut for the past two years, mainland fund groups and even the official Xinhua news agency had lobbied heavily in support of China's inclusion. They argued that Beijing had done enough to address MSCI’s market-access concerns.
In any case, asset managers have already been preparing for eventual inclusion. US-based Vanguard has been buying A-shares for its global EM stock index fund since November. Moreover, BlackRock’s iShares ETF unit and Hong Kong firms GF International and CSOP Asset Management have launched ETFs tracking the MSCI China A International index, which provides A-share exposure in investors’ MSCI global EM benchmarks.