19 April 2018
Trading has been humdrum but Chinese stocks have surprisingly strengthened after MSCI delayed the inclusion of A-shares in its indices. Photo: CNSA
Trading has been humdrum but Chinese stocks have surprisingly strengthened after MSCI delayed the inclusion of A-shares in its indices. Photo: CNSA

MSCI delay of A-share debut not a big surprise

US index compiler MSCI Inc. again held off on adding Chinese A shares to its key emerging market indices but the decision had little effect on the domestic market.

The Shanghai Composite Index rose 1.58 percent Wednesday and the growth enterprise board rallied 3.42 percent.

Turnover also picked up but blue chips ended up fairly flat.

The market rally was quite surprising given investors typically trade on expectations.

Last June, the Shanghai market was up 5,000 points when MSCI announced its decision to leave out A shares from its indices.

Stocks slumped to 4,000 points within a week.

By contrast, A shares now are about half their peak, with the Shanghai benchmark hovering around 2,800.

The latest MSCI decision has been priced in after regulators and research houses tempered investor expectations.

Even if MSCI had given A shares the green light, it would have brought no more than 150 billion yuan (US$19.33 billion) into the domestic stock market.

That’s less than one-third of the combined daily turnover in Shanghai and Shenzhen.

The impact of an MSCI nod on capital inflows is more psychological or sentimental than substantial or immediate.

MSCI continues to be vague about the big day, evidently to press Beijing to put more spark into its ambitions.

MSCI changed the language of its announcement this year to “delay” as opposed to last year’s notice that it had “decided” not to include A shares in its indices.

The wording is subtle, suggesting A shares will ultimately make it but with some delay.

MSCI also said it does not rule out a potential off-cycle announcement should further significant positive developments occur before June 2017.

It intends to use that process to push mainland regulators into accelerating reform and satisfying demand from global investors.

Remy Briand, MSCI managing director and global head of research, told a conference call that in recent months, Chinese authorities have made significant improvements in the accessibility of the A-share market to global investors.

Chinese authorities have resolved issues regarding beneficial ownership and enhanced regulations on trading suspensions, which were flagged as the most critical by investors.

Also, they changed the QFII policy to address concern over quota allocation and capital mobility restrictions.

At present, there are two major outstanding issues — the 20 percent monthly repatriation limit and local exchanges’ pre-approval restrictions on new financial products.

Both issues could be resolved quickly if the Chinese authorities are determined enough.

The removal of these hurdles will not only convince MSCI to finally include A shares in its indices and help draw billions into the market but also improve China’s stock market as a whole which in turn will attract more global investors.

The delay might force Beijing to take immediate measures to shore up market confidence.

This article appeared in the Hong Kong Economic Journal on June 16.

Translation by Julie Zhu

[Chinese version 中文版]

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Hong Kong Economic Journal columnist

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