When MSCI decided not include A-shares in its June 2015 review, there was hardly any surprise to that outcome. After all, investment quotas were few, access restrictions were heavy, and the market had ballooned to record valuations.
But this time around, there was more of a sense that China’s time had come and it had done enough to be included. And the sting of rejection must have really hurt if the statement from the China Securities Regulatory Commission is anything to go by.
“China is already the world's second largest economy, the international influence of A-share market is gradually being improved,” said the CSRC today. “Any international index that does not include A-shares is not complete.”
But the substance and the form of the MSCI decision shows China still has plenty to do to make its markets suitable for international investors and China’s regulators will need to come to terms with that.
True, Beijing made incredible strides in the months ahead of the June 14 decision. It introduced significant relaxations to its qualified foreign institutional investor (QFII) regime, it clarified beneficial ownership rules, and it got the exchanges to tackle the thorny issue of long-term voluntary suspensions. All three had been huge red flags that the A-shares market was just not ready to enter the big league.
Yet, the reforms came too late for MSCI and more importantly they came too late for its client base. The fact that on two occasions MSCI refers to China’s market liberalisations as “unique” shows just how much uncertainty is out there.
And with unresolved problems around basics such the ability of investors to get their money out of China, MSCI had no choice but keep A-shares out this time around.
But as the CSRC comment makes clear, China is not used to being told no. It has certainly be able to win over bigger organisations than MSCI. After all, despite wide ranging objections, last year the International Monetary Fund (IMF), gave in to China when it decided to include the RMB in its special drawing rights basket of currencies, which is technically reserved for freely usable and widely used currencies.
The technicalities of the IMF definitions allowed them to admit China, with the RMB officially entering the basket in October. But few in the markets can deny that the RMB still has a long way to being a global, free currency, starting with the fact that two exchange rates and two yield curves exist for the onshore RMB and the offshore RMB.
The perspective from Beijing is easy to understand, the volatility in the foreign exchange markets and the collapse of the equity market between the summer of 2015 and early 2016 did not exactly give stability-obsessed authorities the breathing room to really loosen their grip on capital flows.
But MSCI and the investors view is equally reasonable. The gist of the announcement is that they appreciate the efforts, but they won’t bend their criteria to please China’s desire for positive PR. The truth hurts but MSCI was right not to compromise.