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MSCI delays including China 'A' shares' in benchmark index
[NEW YORK] US index provider MSCI Inc said on Tuesday it will hold off including China-listed shares in one of its key benchmark indexes, but expects them to be incorporated once outstanding market accessibility issues are resolved.
The failure to include the shares in the index now is seen as a setback for China's attempts to promote its yuan currency globally and attract foreign capital through a raft of financial reforms.
"In our 2015 consultation, we learned that major investors around the world are eager for further liberalisation of the China 'A'-shares market, especially with regard to the quota allocation process, capital mobility restrictions and beneficial ownership of investments," said Remy Briand, MSCI Managing Director and Global Head of Research.
MSCI said the decision around China-listed shares will remain on the 2016 review list for potential inclusion into its emerging market index.
The decision may fall outside of its regular schedule of classification reviews, MSCI said in a statement.
A decision to include domestic Chinese stocks in the widely-tracked MSCI Emerging Markets Index would have injected an estimated US$400 billion of funds from asset managers, pension funds and insurers into mainland China's equity markets over time, MSCI has estimated.
But MSCI's hesitation shows foreign fund managers still have reservations about Beijing's willingness to fully open up its capital markets while several investment constraints persist, including restrictions on getting money in and out of the country, settlement risks and investment quotas.
Chinese "A" shares are listed in Shanghai and Shenzhen and denominated in yuan.
This is the second time MSCI has given China the thumbs-down. MSCI originally proposed in March 2014 to include Chinese "A" shares to its Emerging Markets Index, but the plan was torpedoed by large funds such as Vanguard, Fidelity, and Templeton, which said China had not taken sufficient steps to make its market investable.
Expectations that MSCI would include China's "A" shares this year increased following the landmark November launch of the"Stock Connect" trading link between Hong Kong and Shanghai. The link allowed foreign investors for the first time to buy domestic Chinese stocks directly via Hong Kong.
MSCI also cited the Stock Connect program as well as the imminent launch of the Shenzhen-Hong Kong Stock Connect program as positive developments.
Chinese stock markets, which mouldered in the basement for years in the aftermath of the global financial crisis, have turned into world-beaters in the last year, with the CSI300 index of the largest listed firms in Shanghai and Shenzhen soaring over 150 per cent in 2014.
Separately, MSCI said it will review the MSCI Pakistan index for potential reclassification to emerging markets in its 2016 annual market classification review.
MSCI said it will also seek feedback from investors on the accessibility of Saudi Arabia's equity market following its opening on June 1 and gather information before considering whether to add the Saudi index to the review list for potential inclusion to its broader emerging markets index.