MSCI’s Decision On China A-Shares Nears

Market rules in China have some investors skeptical of the merits of such a move.

Reviewed by: Michelle Price
Edited by: Michelle Price
Hong Kong (Reuters) – Last June, MSCI decided against including China's so-called A-shares in the index, a benchmark for some $1.5 trillion of assets, due to investment restrictions.

Since then, China has addressed many of MSCI's concerns by relaxing its $81 billion qualified foreign institutional investor (QFII) scheme, a quota-based foreign investment scheme, and clarifying foreign ownership rights, prompting MSCI to reconsider inclusion of the A-shares.

But investors are still concerned about some Chinese market rules that could leave foreign investors trapped in the market as they were during last year's slump, when more than 50% of companies listed in China halted trading.

Clarity Sought On Suspension Rules

When and how long a stock can be suspended had to be clearer and stricter, said several investment managers, including State Street Global Advisors, BNP Paribas Investment Partners and Legg Mason.

"The most important issue is stock suspensions," said Paul Danes, Asia chief executive at Martin Currie, a Legg Mason subsidiary. "Stock suspensions can happen on any exchange, but it was the number and the length of suspensions that caused a lot of problems around liquidity and valuations last summer. We have emphasized to MSCI that this is a reasonably big issue."

The Shenzhen and Shanghai exchanges plan to introduce new suspension rules imminently, the China Securities Journal reported on Monday, but it did not provide details.

Since last year, China has simplified its rigid QFII application process. But major investors said it remains unclear how Beijing measures assets under management and how long the new approval process takes.

Lockup Period, Repatriation Cap

China imposes a three-month lockup period on QFII investments, and only allows 20% of net asset values to be repatriated per month. These restrictions have left investors nervous about their ability to get money out of China.

The repatriation cap is a problem, said Kevin Hardy, a managing director at asset manager BlackRock in Singapore, adding though that the company was "very encouraged" by recent QFII reforms.

MSCI declined to comment.

Under its industry consultation, MSCI has proposed adding 5% of the free-float market capitalization of 421 eligible stocks to the benchmark. The shares would account for just 1.1% of the index.

‘Time For Inclusion’

If China is added to the MSCI index, the change would take effect in June 2017.

"Global investors' exposure to China is at an almost ridiculously low level relative to the size of China's economy," said Anthony Cragg, managing director and senior portfolio manager at Wells Fargo Asset Management. “I think the time for inclusion has come, but it needs to come incrementally and be ramped up over time."