Date
18 January 2017
MSCI's decision is another setback for President Xi Jinping’s efforts to raise the profile of China markets and turn the renminbi into an international currency. Photo: Xinhua
MSCI's decision is another setback for President Xi Jinping’s efforts to raise the profile of China markets and turn the renminbi into an international currency. Photo: Xinhua

China A shares again denied entry into MSCI indexes

MSCI Inc. has denied China’s domestic equities entry into its benchmark indexes for a third time, Bloomberg News reports.

The index compiler’s decision is another setback for President Xi Jinping’s efforts to raise the profile of China markets and turn the renminbi into an international currency, the report said.

In a statement on Tuesday, MSCI cited the need for additional improvements in the accessibility of the A-share market.

MSCI, whose emerging-market index is tracked by investors with US$1.5 trillion in assets, said it will reconsider inclusion in its 2017 market classification review, while not ruling out an earlier announcement.

China was rejected despite a flurry of measures this year to address MSCI’s concerns, including curbs on arbitrary trading halts and looser restrictions on cross-border capital flows.

The decision suggests international investors are still uncomfortable putting their money in the US$6 trillion market after a botched government campaign to prop up share prices roiled global equities last year.

While Chinese authorities have demonstrated a commitment to opening the market, “investors clearly indicated that they would like to see further improvements in the accessibility”, Remy Briand, MSCI’s global head of research, said in the statement.

Investors need time to assess the effectiveness of recent policy changes on the quota allocation, capital mobility and trading suspension, the index provider said.

It also said the 20 percent monthly repatriation limit remains a “significant hurdle” for investors that may be faced with redemptions such as mutual funds.

The local exchanges’ pre-approval restrictions on introducing financial products also “remain unaddressed”, it said.

“The MSCI decision signals that China remains a closed emerging economy that uses market techniques like freezing the market and making it illegal to short, using government funds to buy shares – techniques that are not welcome among global investors,” Paul Christopher, head global market strategist at Wells Fargo Investment Institute, told Bloomberg by phone.

“There are a number of market reforms in progress, but these are the decisions MSCI would want to wait for and examine.”

The Deutsche X-trackers Harvest CSI 300 China A-Shares ETF, the biggest US-listed exchange-traded fund tracking mainland stocks, fell 2.3 percent at 6:01 p.m. in after-market trading in New York. The offshore yuan lost 0.2 percent.

The Shanghai Composite Index dropped 2.9 percent over the past two days, extending this year’s slump to 20 percent, as traders braced for a potential exclusion.

Government intervention has also been a key concern for many money managers after officials responded to a US$5 trillion equity crash last year with a share-sale ban on major investors and a crackdown on trading of stock-index futures.

While some of the measures have since been eased, futures volumes are still more than 90 percent below their level a year ago.

Chinese authorities had pushed hard for the MSCI nod.

In February, regulators allowed qualified traders to shift money in and out of the country on a daily basis, a key change for open-ended mutual funds and ETFs.

In May, domestic stock exchanges published rules restricting trading halts. And this month, China gave a 250 billion yuan (US$38 billion) investment quota to the United States, allowing American institutions to invest overseas yuan in mainland markets.

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CG

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