MSCI Emerging Markets Index denied Chinese A shares


June 15,  AtoZForexChina, the world’s most populous state, failed to be included in the MSCI Emerging Markets Index list. Yesterday, the index company said that China still has to improve its markets accessibility to foreign investors. Additionally, MSCI Inc. mentioned that it doesn’t know when it is likely for China’s shares to have a green light in this matter due to new requirements from investors.

China’s market conditions and preparations

China’s market has experienced a year of instability with 40 percent crash in stocks. This crisis was accompanied by the state intervention and mass capital withdrawal. In turn, all these events led to high pressure put on the Chinese currency. Chinese policy makers have been preparing for the inclusion into MSCI’s Emerging Markets Index for the past six months. Caroline Yu Maurer, the head of Greater China equities at BNP Paribas Investment Partners in Hong Kong, commented on this matter:

“Recent developments over the past weeks definitely skewed the decision closer to the favorable side in our view, so we are slightly surprised by this negative outcome.”

Why MSCI Emerging Markets Index denied Chinese A shares?

MSCI global head of research, Remy Briand, believes that China’s reform plan was developing in the right direction. Nevertheless, investors were concerned about the monthly limits on repatriating capital and the procedure for allocating investment quotas. He also added that investors needed more time to evaluate if new share suspension guidelines would be effective in preventing a repeat of last summer. During the last summer more than half of listed companies in China stopped trading in their stock in order to sit out the crash. The CEO of investment consultancy Z-Ben Advisors in Shanghai, Peter Alexander, shared his thought on decision matter:

“The decision highlights a much bigger issue, which is the resistance among global investors to allocate into yuan assets, despite the fact China is home to the world’s second-largest equity market and third-largest bond market.”

Briand also commented on the China’s market:

“There have been a lot of significant improvements made recently by the Chinese authorities to improve accessibility for global investors; however, some of them are relatively recent, so we need a little bit of time to assess the effectiveness of these measures.”

What is the impact of the new MSCI’s objections?

Just recently, MSCI has brought new objections to a rule that obliges foreign investors to have approval from the country’s stock exchanges before the introduction of an A shares-based products. As MSCI has also reported, the new objections could reduce investors’ opportunity for hedge exposure. Briand believes it is a big issue for investors:

“This is a very big problem for investors, and the removal of these requirements is necessary for inclusion.”

MSCI proposed to add 5 percent of the free float value of 421 A shares, which would have justified for 1.1 percent of its benchmark index. If things could go successfully for China, the change would be effective from 2017 June.

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