MSCI says domestic China
shares still not ready for its global benchmark
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[June 15, 2016]
By Michelle Price
HONG KONG (Reuters) - China has failed
again to convince U.S. index provider MSCI Inc to add local Chinese
shares to its key emerging market index, and the company could not
say when it was likely to give the green light, as global investors
raised fresh objections.
The index company said on Tuesday that China still had to do more to
make its markets accessible to foreign investors.
That is a blow for Chinese policymakers who have rushed to address
MSCI's concerns over the past six months in the hope that inclusion
in the Emerging Markets Index, tracked by $1.5 trillion in global
assets, could draw up to $400 billion into China's stocks over the
next decade.
Chinese shares seemed to shrug off the news, however, rising more
than 1 percent in morning trade.
Market-watchers and analysts said the surprise decision, the third
year running it has said no, highlighted reservations among global
institutional investors about yuan-denominated assets and Beijing's
commitment and ability to implement capital markets reform.
China's markets have had a turbulent 12 months, with a 40 percent
crash in stocks, followed by heavy state intervention and an
unprecedented exodus of capital that has put pressure on the Chinese
currency.
"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," said Peter Alexander, CEO of
investment consultancy Z-Ben Advisors in Shanghai.
He added that the decision put global investors "on the wrong side
of history".
China's securities regulator said on Wednesday any global benchmark
index that doesn't include China A shares is incomplete, but the
decision wouldn't affect reforms to open its markets.
Remy Briand, MSCI global head of research, told reporters on
Wednesday that China's reform programme was moving in the right
direction but investors had concerns over the process for allocating
investment quotas and monthly limits on repatriating capital.
He said investors also needed more time to assess if new share
suspension rules would be effective in preventing a repeat of last
summer, when more than half of China's listed companies halted
trading in their stocks to sit out the crash.
"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,"
Briand said.
NEW OBJECTIONS
MSCI this year raised new objections to a rule that requires foreign
investors to seek approval from the country's stock exchanges before
launching products based on A shares, which MSCI says could reduce
investors' ability to hedge exposure.
"This is a very big problem for investors, and the removal of these
requirements is necessary for inclusion," Briand said.
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An investor looks at an electronic screen showing stock information
at a brokerage house in Nanjing, Jiangsu Province, China, May 9,
2016. China Daily/via REUTERS
He added that the company could not commit to a timeline for
inclusion and could not rule out the possibility that new issues may
arise as discussions continued.
Under an industry consultation re-launched in April, MSCI had
proposed adding 5 percent of the free float value of 421 A shares,
which would have accounted for 1.1 percent of its benchmark index.
If the decision had gone China's way, the change would have taken
effect in June 2017.
Expectations that MSCI would say yes this time climbed after Chinese
authorities rushed through a series of fixes over the past five
months, including relaxing the country's quota-based foreign
investment scheme, clarifying foreign ownership rights, and
tightening up share suspension rules.
"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," said Caroline Yu
Maurer, head of Greater China equities at BNP Paribas Investment
Partners in Hong Kong.
Many analysts had put the chances of inclusion at 50 percent or
higher, with Goldman Sachs raising the odds to 70 percent last
month. In a note published on Wednesday, HSBC said it had
"under-estimated the resistance from the global investment
community".
Tuesday's outcome highlighted growing divisions among global
investors, with local China managers saying the decision process
appeared to be driven by the concerns of MSCI's U.S. client base,
though the index is tracked globally.
Francois Perrin, portfolio manager, greater China markets, at East
Capital, said MSCI put too much emphasis on the remaining problems
with the QFII scheme and the product pre-approval issue.
"It seems that many of these objections are coming from passive
managers, based out of the United States."
MSCI said investors beyond Asia do tend to have more reservations,
but it takes into account a range of investor feedback.
BlackRock, the world’s largest passive manager, said: “As a
long-term investor, we would welcome further progress in
facilitating broader participation in the nation’s domestic stock
markets for international investors.”
(Reporting by Michelle Price and Saikat Chatterjee; Editing by Will
Waterman)
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