MSCI finally gives nod of approval for mainland share inclusion in its emerging markets index

By Li Qiaoyi and Xie Jun Source:Global Times Published: 2017/6/21 5:17:09

Photo: Xinhua


 
The fourth attempt to have Chinese mainland stocks added to the MSCI Emerging Markets Index has succeeded, with the New York-based index compiler giving the thumbs up to the addition of yuan-denominated shares early Wednesday morning Beijing time.  

"This decision has broad support from international institutional investors with whom MSCI consulted, primarily as a result of the positive impact on the accessibility of the China A market of both the Stock Connect program and the loosening by the local Chinese stock exchanges of pre-approval requirements that can restrict the creation of index-linked investment vehicles globally," the index provider said in a statement posted on its website announcing the inclusion decision. The inclusion of 222 large-cap mainland stocks with a weighting of approximately 0.73 percent of the index will take effect in June 2018.

"International investors have embraced the positive changes in the accessibility of the China A shares market over the last few years and now all conditions are set for MSCI to proceed with the first step of the inclusion." said Remy Briand, MSCI Managing Director and Chairman of the MSCI Index Policy Committee in the statement.

The decision indicates an increase of the number of mainland stocks to be included in the MSCI index to 222 from 169 suggested in this year's index proposal. A consultation paper published earlier this year cut the number of eligible mainland stocks to 169 from the previous 448. The stocks on the shorter list are restricted to large-cap companies that are accessible via stock connect links with Hong Kong.

Many international institutional investors recommended that "MSCI include China A Large

Cap shares of companies that already have H share equivalents in the MSCI China Index," hence the change.

"The expansion of Stock Connect has been a game changer for the market opening of China A shares." said Briand.

"When further alignment with international market accessibility standards occurs, sustained accessibility is proven within Stock Connect and international institutional investors gain further experience in the market, MSCI will reflect a higher representation of China A shares in the MSCI Emerging Markets Index. MSCI is very hopeful that the momentum of positive change witnessed in China over the past years will continue to accelerate. "

"We're pleased to see the inclusion of A shares into the MSCI index and welcome it," Zhang Xiaojun, a spokesman for the China Securities Regulatory Commission, told a press conference on Friday.

Any emerging market stock index without Chinese shares would be quite incomplete, the spokesman noted, adding that the inclusion is a commercial decision by MSCI, which won't change the path of reforms in China's stock market and its overall financial sector toward being more market-oriented, internationalized and governed by the law.

The announcement marks a modest yet symbolic breakthrough, market watchers said.

The inclusion will boost overseas investors' need for A shares and give the blue-chip stocks a bit of a lift, Li Daxiao, chief economist at Shenzhen-based Yingda Securities, told the Global Times. As the Hong Kong and mainland markets are increasingly interconnected, the inclusion of A-shares in the MSCI index will also help drive up the Hong Kong-listed shares, he said.

Nevertheless, it's not very likely that the move will immediately draw capital inflows directly into A shares.

The inclusion of A shares in the MSCI will not affect the mainland stock markets very much, because A-share markets are still very closed to direct overseas investment, Dong Dengxin, director of the Finance and Securities Institute at Wuhan University of Science and Technology, told the Global Times.

"If A shares are included in the MSCI index, overseas investors who want to buy A shares can only do so via the QFII program or the stock connect programs with Hong Kong, both of which have strict quota restrictions. As such, the amount of overseas capital that will flow into mainland markets will be very limited compared with the size of the markets."

Still, it is believed that the move is a prelude to a longer list in years to come, and it will act as a spur for deeper reform in China's financial markets.

The range of A shares that will be included in the index will also gradually expand from the current 222 to about 300, according to Li at Yingda Securities.

He went to say that the inclusion will also push reforms in the mainland stock markets, making the investment climate "more mature" and introducing greater standardization.

Dong pointed out that the mainland exchanges are not fully market-oriented, their levels of internationalization are low and the legal regime they operate under still has some way to go. For example, IPOs are still subject to government approval, domestic investors do not have strong legal protections, and overseas companies can't list in the mainland.

"Inclusion in the MSCI index will help stimulate reforms in those sectors, but it's hard to say how much. Let's hope for the best," Dong noted.

From 2014 to 2016, annual attempts to achieve MSCI inclusion failed, with the index provider citing obstacles such as capital restrictions and trading suspensions.

Years of effort by regulators to open the equity market wider to overseas investors and bring more order to the market laid the foundations for the inclusion, market watchers said.

The government made a lot of improvements in the A-share markets in recent years, such as standardizing the suspension mechanism and broadening stock trading mechanisms such as the Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect.

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