After completing an annual review, the global index provider said it would form a working group with the China Securities Regulatory Commission to resolve concerns and issues highlighted by international institutional investors during its consultation.
“The concerns include, but are not limited to, the quota allocation process, capital mobility restrictions and beneficial ownership of investments,” MSCI said.
Most international investors have said that they want access to investment quotas according to the size of their assets under management and preferred a more streamlined, transparent and predictable quota allocation process.
The index provider said it may announce the decision to include China A‐shares in the MSCI Emerging Markets Index when these issues are ironed out and could happen outside the regular schedule of its annual market classification review, which typically happens in June.
Even if the MSCI decides to include A-shares, it will not have a significant impact on active managers, according to Matthew Sutherland, head of product management for Asia at Fidelity Worldwide Investment.
“While inclusion in benchmarks will result in some passive flows, active managers are not expected to significantly change their views as a result of a benchmark change.
“Fidelity’s fund managers continue to find good investment opportunities in China, and we are actively investing in the market through our $1.2bn of QFII quota,” said Sutherland.
Market letdown
The markets as well as industry observers were disappointed with today’s decision. China stocks fell in morning trade but later recovered losses.
“For all the hype, MSCI went with a `goldilocks’ approach in its decision on China A-share inclusion,” said Z-Ben Advisors, a China-based consulting firm.
It also marked the second time MSCI rejected China A-shares. In June 2013, the firm initiated a review of China A‐shares for a possible inclusion in the MSCI Emerging Markets Index. But in 2014, it decided not to do so.
However, some remain optimistic.
“It is a measure of the pace at which the reforms have taken place in China that MSCI is willing to show flexibility on the scheduling for inclusion,” said Michael Chan, managing director and head of asset servicing for Asia-Pacific at BNY Mellon.
“Clearly, the imminent launch of a Shenzhen (which represents a large chunk of China’s equity market) Connect scheme is a key driver for benchmark inclusion, and its launch will likely see another reassessment later this year,” Chan added.
Expectations are riding high that the Shenzhen-Hong Kong Connect will be launched this year. However, no official date for the launch has been announced.
Reforms noted
MSCI noted China has taken “significant positive market‐opening developments” since its 2014 annual market classification review. These include the launch of the Shanghai‐Hong Kong Stock Connect program and the expansion of RQFII program to 12 cities from four.
“Substantial progress has been made toward the opening of the Chinese equity market to institutional investors,” said Remy Briand, MSCI’s managing director and global head of research.
“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,” Briand said.
