MSCI delays A shares in index for 3rd time
Print Edition
GLOBAL index provider MSCI Inc yesterday said it would delay including A shares into one of its flagship indexes as concerns about market accessibility and capital mobility linger.
MSCI highlighted the 20 percent monthly repatriation limits as a “significant hurdle” for investors, while anti-competitive clauses adopted by Chinese exchanges that restrict the launching of financial products linked to A shares in overseas markets also impeded the integration of A shares.
The delay marks the third failure to add A shares in MSCI’s widely followed emerging market index, which is tracked by money managers who manage US$1.7 trillion in assets. In 2015, MSCI rejected A shares due to concern about the quota allocation process, curbs on capital mobility and beneficial ownership of investments.
MSCI said it would retain the A shares inclusion proposal for the 2017 Market Classification Review and it did not rule out a potential off-cycle announcement should further significant positive developments occur before June 2017.
“China is now the world’s second-largest economy. The international influence of A shares is growing and any international index without A shares is incomplete,” Deng Ge, spokesman for the China Securities Regulatory Commission, said in a statement before the market opening yesterday. “The delay won’t affect China’s process toward market reforms and opening-up.”
China stocks gained despite the rejection, with the Shanghai Composite Index adding 1.58 percent, the biggest advance in two weeks, to end at 2,887.21 points yesterday.
Analysts said the decision won’t have a substantial impact on the market due to the limited participation of foreign funds in mainland equities.
“Though the quotas for foreign investors have been increasing over the past few years, China’s equity market is very domestic. Cross-border flows are expected to have little impact on the domestic market in the near term,” said ANZ Research in a note.
Assuming A shares were included with an initial weighting of 5 percent, inflows of 145 billion yuan (US$22 billion) from overseas funds could be expected in the A-share market over one year, which is a fraction compared with the average turnover of 7.5 trillion yuan annually in A shares over the past five years, according to ANZ.
Pressure on A shares
But some see downward pressure on the market due to the potential withdrawal of funds that had been buying A shares in the past few weeks betting on a positive decision by MSCI on A shares.
“We notice that many investors have already positioned themselves for the MSCI inclusion in previous weeks via the stock connect, offshore A-share ETFs and A-share index futures,” said Lu Wenjie, China equity strategist at UBS Securities. “We believe the unwinding of these trades could add pressure to A shares in the short term.”
Expectation was running high that MSCI would include A shares this year after Chinese authorities made several efforts in the past few months to address investor concerns over trading in the country’s much-shielded capital market.
Several measures have been taken to relax policies over quota allocation and capital mobility under the Qualified Foreign Institutional Investor program, tighten trading suspension rules and clarify the beneficial ownership rights of foreign investors under China’s cross-border investment programs.
Remy Briand, MSCI managing director and global head of research, said investors have recognized the actions taken but they need some time to observe to assess the effectiveness of the measures.
“There have been significant steps toward the eventual inclusion of China A shares in the MSCI Emerging Markets Index,” Briand said in a release. “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.”
In February, China eased QFII rules by allowing foreign investors to invest a base amount linked to their asset size in the domestic market without needing approval and allowing them to move funds in and out of China daily, up from the previous weekly basis.
However, MSCI said some global investors complained they were still awaiting their QFII quota allocation for applications submitted months before while other investors said that they were not yet able to benefit from daily capital repatriation even after policy changes had gone into effect.
“Meanwhile, although China’s two exchanges last month announced stricter rules on trading suspensions by listed companies, around 6 percent of shares constituting the MSCI China A Index are still frozen, compared with a suspension rate of 0.2 percent in global markets,” Chin-Ping Chia, MSCI’s head of research for Asia-Pacific, told an online seminar yesterday.
During China’s stock market meltdown last year, over half of its 2,800 listed firms suspended trading to prevent share prices plunging, citing the vague phrase “significant matters.”
“A lot of investors participating in A shares had experience in dealing with that,” said Chia. “A big part of people’s portfolio was suspended, and they couldn’t get any liquidity. It created a lot of issues.”
With offshore investors flagging capital repatriation limit as their top concern, Nomura Securities said: “The removal of the limit may increase the pressure of capital outflows during onshore market downturns, and this is a valid concern of Chinese authorities.”
“The difficulty of raising assets under management for Chinese equities is at least partly driven by unforeseen volatility from the financial side of the Chinese economy over the past year,” Nomura said.
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