China stocks struggling for MSCI inclusion

Source:Reuters Published: 2015-3-15 21:53:01

Global fund managers require further reform


China must make bolder market reforms before Chinese-listed shares can be included in key MSCI emerging market benchmark indexes, leading global fund managers and MSCI insiders told Reuters.

Anticipation that MSCI would push ahead with plans to include locally listed China A shares in its Emerging Markets Index, which is tracked by $1.7 trillion of funds, increased following the November launch of the Shanghai-Hong Kong Stock Connect scheme, which has helped open up China's tightly controlled capital market.

But, despite strong lobbying by China, some of the world's biggest fund managers want the country to go further with its market reforms. That lack of support is likely to scupper Chinese hopes that global index compiler MSCI would add Chinese mainland-listed stocks at its annual review in June.

MSCI, too, is disappointed by a lack of progress on several issues that make it difficult and expensive to move money in and out of the Chinese mainland's capital markets.

"In my view, most of those issues remain," said one MSCI insider who didn't want to be named because the subject is highly sensitive. "I'd be very surprised if we manage to get A shares included even this time around, going by the preliminary chats I've had."

Chinese shares listed overseas already account for 18.9 percent of MSCI's emerging markets index. Including all China's domestic shares could trigger the largest-ever global equity rebalancing, and drive up that figure to 27.7 percent. Some predictions suggest $300 billion will eventually flow into the Chinese mainland market.

A spokeswoman for MSCI declined to comment. The China Securities Regulatory Commission (CSRC) did not respond to requests for comment. China's State Administration of Foreign Exchange, which controls investment quotas, also did not respond to requests for comment.

MSCI is expected to discuss adding China A shares - the yuan-denominated shares listed on the Shanghai and Shenzhen exchanges - in May, before announcing a decision in June. MSCI declined to confirm the date of its May meeting.

Chinese regulators, keen to attract more long-term institutional money, are scrambling to tackle other market constraints, and still hope to persuade global investors to give MSCI the green light, fund managers and lawyers told Reuters.

As part of its lobbying campaign, the CSRC last month sent a delegation to New York and Boston to reassure investors that China is committed to capital market liberalization.

A second individual familiar with MSCI's thinking said MSCI was still trying to persuade major clients, which include investment giant BlackRock and other index funds, to back its plan.

But these firms first want to see China solve critical investment obstacles relating to the stock connect system and its quota-based institutional investment programs.

These investment restrictions include confusion over whether foreign investors can enforce their rights to assets held in China and limits on how frequently investors can repatriate capital out of China.

Reuters

Posted in: Markets

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