The lowdown: MSCI's A-shares 2016 review
Index firm MSCI said on June 14 that it was once again delaying the inclusion of Chinese A-shares in its emerging market index. Here is GlobalRMB's quick guide to what you need to know.
What did MSCI say?
The short answer is not yet. Investor concerns about market accessibility mean that any decision will now be part of the 2017 review. However it did leave open the possibility of an “off-cycle announcement” if Chinese regulators address the concerns before June 2017. Click here for the official announcement.
Haven't we heard this before?
Yes, this is the third time that MSCI has decided not include A-shares citing market accessibility issues. So much for third time lucky. Click here for news on the 2015 review.
Where are the problems?
There are two main obstacles. First is the 20% monthly cap on repatriation of QFII investments which basically means that if funds have large outflows, they might not be able to give clients back their money. MSCI said the timing needs to be shortened or the cap needs to be removed entirely. The second is the need the requirement by Chinese exchanges that any financial product that is link to an index containing A-shares needs their approval. This restriction applies to new and existing products.
What else needs to worked out?
MSCI was at pains to recognise and welcome the recent clarifications China has made on beneficial ownership and stock suspensions rules as well as the relaxation of QFII investment guidelines. But as most of these came in the last month, unsurprisingly investors want a bit of time to see how these play out over the coming months.
What will inclusion look like?
Once included, with an initial 5% factor, A-shares will represent about 1.1% of the MSCI Emerging Markets Index.
So all this fuss about 1.1%?
Umm, yes. Even once an initial inclusion takes place, analysts are predicting initial inflows to A-shares of no more than $20bn to $30bn from active and passive funds. This is small potatoes compared to A-shares’ market cap of $6.7tr.
What happens now?
The Chinese authorities have been pushing through reforms at record pace in the past few months, including the complete liberalisation of access to the China interbank bond market, so it is reasonable to expect them to tackle outstanding issues. However, any changes will need to balanced against China’s need to keep its markets stable.
When could inclusion take place?
Once the remaining issues are addressed, MSCI could call for another off-cycle review, interviewing investors and analysing feedback to decide how early A-shares inclusion can move forward. Alternatively, the next yearly review will be completed in June 2017 with possible inclusion in June 2018.
Where do MSCI’s competitors stand on all this?
FTSE announced at the end of May 2015 it was launching a parallel emerging markets index that would include A-shares with an initial 5.6% weighting.Meanwhile, Vanguard, one of the world’s largest asset managers, has already transitioned its FTSE Emerging Markets Stock Index Fund to include A-shares.
S&P Dow Jones last reviewed A-shares in July 2014, when it decided not to include Chinese stocks in its emerging markets indices. It did, however, launch on February 2015 the S&P Access China A Index, which tracks stocks traded on the Shanghai Stock Exchange that are available to foreign investors through the Shanghai-Hong Kong Stock Connect programme.
Want to know more?
Check out a selection of GlobalRMB’s stories on A-shares inclusion below: