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MSCI delays China A Shares inclusion in Global Indices

The US based index and benchmark provider MSCI announced on Tuesday that it will defer adding yuan denominated equities, also referred to as A Shares, to its indices until concerns over ease of access and investment quotas are resolved with the nation’s securities regulator. The index provider could consider including China ‘A’ shares before the next annual review in June 2016, it added.

MSCI and the China Securities Regulatory Commission (CSRC) will form a working group to contribute to the successful resolution of these issues, the index provider said in its statement. “Substantial progress has been made toward the opening of the Chinese equity market to institutional investors,” said Remy Briand, MSCI Managing Director and Global Head of Research. Citing what MSCI described as “significant positive market‐opening developments in the Chinese capital market.”

Investors, however, expect further liberalisation on the quota allocation process, capital mobility restrictions and clarification on beneficial ownership of investments, amongst others, to be resolved by China before inclusion of the A Shares in the widely referenced indices.

Quota allocation process

A more streamlined, transparent and predictable quota allocation process is required. International investors told MSCI that having reliable access to quota is a critical requirement. They believe that large investors should be given access to quotas commensurate with the size of their assets under management. This is especially important for passive investors, whose investment processes replicate benchmarks. In addition, all investors said that they need sufficient flexibility and assurances to be able to secure additional quota of securities should the need arise.

Capital mobility restrictions

Investors say that they need access to daily liquidity. They believe that this access should apply to all investment vehicles, including open‐ended funds, ETFs and segregated accounts. Some investors have continued to express concerns about restrictions on capital lock‐up and the limit on the amount of repatriation. Finally, in the context of Stock Connect, investors feel that the daily limit imposed on the “northbound access” (access to Shanghai‐listed A‐shares through the Hong Kong Stock Exchange) should be lifted because it is a great source of trading uncertainty for passive investors, who typically trade on market close.

Beneficial ownership

MSCI applauds CSRC’s recent clarification on the Stock Connect beneficial ownership issue. MSCI expects this clarification to make international investors more confident in using the Stock Connect scheme. Time and experience are needed for investors to provide their final assessments. Additionally, a large number of asset owners invest through segregated accounts, delegating investment decisions to their fund managers, – recognizing clear title of ownership for the ultimate beneficial owners is therefore critical.

Progress has certainly been made, since the 2014 Annual Mark Classification Review announcement, MSCI has continued to observe positive market-opening developments in the Chinese capital market including:

  • The successful launch of the Shanghai-Hong Kong Stock Connect program (“Stock Connect”)
  • Expansion of RQFII program from four cities to 12 cities
  • Clarification of the capital gains tax

MSCI forecasts that global funds would add around $20bn to the Shanghai and Shenzhen markets as a result of its plans. It says clients will be given at least 12 months’ notice between an announcement and formal implementation into the indices.

The full Results of MSCI 2015 Market Classification Review are available here.

An updated Consultation on China A-Shares Index Inclusion Roadmap is available here.

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