MSCI has not decided to include China stocks in its index yet - as opposed to what mainstream media believes. MSCI instead says the inclusion is "on track" for inclusion but there remains three significant hurdles including liquiidty restrictions.
Full MSCI Statement on China inclusion:
MSCI, the premier provider of global equity indexes, announced today that it expects to include China A?shares in its global benchmarks after a few important remaining issues related to market accessibility have been resolved. MSCI and the China Securities Regulatory Commission (CSRC) will form a working group to contribute to the successful resolution of these issues.
“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. “In our 2015 consultation, we learned that major investors around the world are eager for further liberalization of the China A?shares market, especially with regard to the quota allocation process, capital mobility restrictions and beneficial ownership of investments.”
Briand continued, “Because MSCI’s client base is so large and diverse, we have a strong interest in ensuring that remaining issues are addressed in an orderly and transparent way. We are honored that the CSRC has recognized MSCI’s expertise regarding the requirements of international institutional investors. We look forward to a fruitful collaboration that will contribute to the further opening of the China A?shares markets to international investors and the inclusion in the MSCI Emerging Markets Index.”
MSCI stated that it may announce the decision to include China A?shares in the MSCI Emerging Markets Index as soon as the issues it has outlined are resolved. This may happen outside the regular schedule of its annual Market Classification Review.
China A?shares
MSCI will collaborate with the CSRC over coming months to facilitate discussions designed to lead to the implementation of policies that effectively resolve the remaining accessibility issues in the China A?shares market.
Since its 2014 Annual Market Classification Review, MSCI has continued to observe significant positive market?opening developments in the Chinese capital market. These developments include the successful launch of the Shanghai?Hong Kong Stock Connect program (“Stock Connect”), the expansion of RQFII program from four cities to 12 cities and the clarification of the capital gains tax. In addition, the imminent launch of the Shenzhen?Hong Kong Stock Connect program and potential further liberalization of the QFII program should further improve the accessibility of the China A?shares market.
The working group aims to facilitate discussion and understanding of accessibility concerns and potential solutions that were highlighted by international institutional investors in MSCI’s 2015 consultation. The concerns include, but are not limited to, the quota allocation process, capital mobility restrictions and beneficial ownership of investments.
1. Quota allocation process. Global investors told MSCI that having reliable access to quota is a critical requirement. They believe that large investors should be given access to quota 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 assurance to secure additional quota should the need arise. Most international investors have indicated a preference for a more streamlined, transparent and predictable quota allocation process.
2. Capital mobility restrictions. Liquidity is a critical component of the investment process. Regardless of the channel they use, 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 separate 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.
3. 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 actual experience, however, are needed for investors to provide their final assessments. A large number of asset owners invest through separate accounts. Because they typically delegate investment and operational decisions to their fund managers, recognizing clear title to ownership for the ultimate beneficial owners is a crucial concern.
Recognizing the significant progress to date and ongoing reform efforts, China A?shares will remain on the 2016 review list for potential inclusion into Emerging Markets.
MSCI has updated the consultation document that describes the proposed index inclusion roadmap for China A?shares in the MSCI Emerging Markets Index. This roadmap, which was introduced in March 2014, proposes to partially include China A?shares in the pro forma MSCI China Index and its corresponding composite indexes, including the MSCI Emerging Markets Index, at 5% of its FIF?adjusted market capitalization.
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For the cynics among you, we wonder (out loud) if the push for inclusion of Chinese stocks is preparation for a full-blown Chinese QE which, if unleashed, will send Chinese Stocks soaring and implicitly lift all MSCI boats on the back of it, thus enabling a far greater "wealth creation" channel effect to the world (multiplier) than if China was absent... but that would just be conspiracy theory wonkishness.
