MSCI delays A-share inclusion yet again

Singapore

IN A NOD to institutional investors still dissatisfied with the accessibility of China's stock market, influential benchmark provider MSCI announced it will once again delay the inclusion of China's A-shares in its emerging markets index.

However, analysts said that the inclusion - talked about since 2014 - was only a matter of time. The event itself is unlikely to lead to a rush into Chinese stocks that will distort prices, they said.

"The experience of the Korea and Taiwan markets suggests that MSCI inclusion does not necessarily mean a change in the underlying market trends," said HSBC's head of Hong Kong and China equity research, Steven Sun and strategy associate Kate Zhang in a Wednesday note.

HSBC estimated that passive index-tracking inflows into the A-share market could be US$4 billion to US$6 billion, or 6 per cent of average daily market turnover, should there be the partial 5 per cent inclusion MSCI talked about.

Inflows from active funds could be three times bigger, HSBC said. But the actual impact on liquidity is limited as active fund inflows tend to run ahead of passive inflows by a year, it said. It kept a "neutral" stance on the A-share market.

AXA Investment Managers senior emerging Asia economist Aidan Yao said that he estimated US$22 billion of inflows from global passive and active funds tracking three MSCI indices affected by the change.

Even so, the A-share market is a US$6.7 trillion market and US$21 billion only accounts for 0.33 per cent. "Having said all this, one should not underestimate the positive spillover on sentiment (should there be an inclusion)," he said.

Morgan Stanley Research maintained a 2,900-point target on the Shanghai Stock Exchange Composite Index. It said the market might trade lower near-term.

China's markets have already been hurt in the past year by widespread investor scepticism after extreme volatility from a burst bubble, worries over yuan depreciation, a China slowdown and high corporate debt levels.

They nevertheless rose on Wednesday's news, with the Shanghai index ending on Wednesday trading at 2,887 points, up 1.6 per cent. This was "probably because little was priced into the market beforehand", said AXA's Mr Yao.

MSCI, whose benchmark indices are replicated to varying degrees by money managers around the world, first began reviewing yuan-denominated mainland Chinese stocks, known as A-shares, for a possible inclusion in June 2013.

But institutional investors were opposed to the plan in 2014 due to various trading restrictions and quotas they faced. MSCI held off from its plan again in 2015, citing worries over the quota allocation process, capital mobility restrictions, and issues over beneficial ownership in a scheme that connected the Shanghai and Hong Kong markets.

Since then, the beneficial ownership issue has been sorted out. A sticking point now with investors is a restriction against them repatriating, on a monthly basis, more than 20 per cent of prior-year net asset value.

"This limit poses a potential liquidity concern for investors who need to honour redemption outflows from their clients," MSCI said in a press release.

Another sticking point is a clause where existing and new financial products linked to any index containing A-shares have to be pre-approved by local Chinese stock exchanges, even if the product is listed around the world.

Despite the delay, MSCI struck a positive note, noting there have been significant steps towards an eventual inclusion due to a clear commitment on the part of Chinese authorities to bring their domestic markets to international standards.

MSCI said a potential off-cycle announcement is possible should there be significant positive developments ahead of June 2017, the next review date.

Deng Ge, spokesman for China's stock market regulator China Securities Regulatory Commission (CSRC), said in a statement in Chinese on CSRC's website that the decision will not affect the reform and opening-up process of China's capital markets.

He said MSCI is a business and makes its decisions on commercial grounds, and CSRC will support its proposal to include A-shares in MSCI's emerging markets index.

Mr Deng also said that any international index without A-shares in them will not be complete.

"China is already the world's second-largest economy. The A-share market's influence on the world is increasing," he said.