What do you do if the world’s biggest asset manager, which is also your biggest client, backs a course of action that you as a company have so far turned down three times? That’s the position MSCI finds itself in after BlackRock, which manages $5.4tr in assets, said last week that it supported including Chinese A-shares in the index provider’s emerging market benchmarks.
In the past three annual reviews MSCI has so far refused to include A-shares and with good reason. The feedback from global investors was that channels for buying and selling Mainland stocks remain too cumbersome and too uncertain to meet the requirements of international asset managers.
However, that three-year trend looks certain to be reversed this time around after BlackRock spoke out. MSCI had already provided a strong hint of as much in March when it presented a revised plan that slashed the inclusion target from 448 stocks to just 169. The index provider applied a range of filters — from excluding A-shares that are also listed in Hong Kong to only permitting stocks available through the Shanghai and Shenzhen stock connects — that means their entry is now largely seen as a forgone conclusion when the next review comes around in June.
But if the new filtered A-shares do make it in EM indices, they will only make up 0.5%, down from the previously proposed 1%, with the weighting falling from 3.7% to 1.7%. All of which makes the move largely a symbolic one.
These high on symbolism, low on impact events have been one of the hallmarks of renminbi internationalisation. While it’s true that the use of renminbi on a global basis has made huge strides over the past 10 years, the project is at a bottleneck. Firms such MSCI know that excluding China is no longer an option, but with the country’s financial markets operating in a way that is so foreign to the global system, some sort of fudge or compromise is the end result.
The inclusion of renminbi in the SDR basket is a prime example of this. IMF announced its decision on the renminbi entry in December 2015, but the new basket did not go live until October 2016. While the delay was justified on operational grounds — allowing members time to update their systems — if the currency was fully convertible it would already be integrated into institutions’ back offices.
The champions of the renminbi project will of course argue that symbolic steps have been key to the progress of the currency’s globalisation and they would be correct.
And that was fine when activity was largely confined to the offshore market. But as China’s financial system integrates more with international markets, the providers of global benchmarks should take caution that these compromises do not dilute new initiatives to the extent that they help ingrain the inefficiencies in China’s markets rather than spur progress.