China’s regulators are taking more aggressive steps to open the country’s capital markets to foreign investors in the run-up to a midyear decision by MSCI Inc. on whether to begin adding China’s A shares to the firm’s benchmark equity indexes.
MSCI’s annual June review of its indexes will be the company’s second bite of the China apple. Last year, MSCI ultimately decided not to proceed with a proposed inclusion of an initial 5% of China’s A-shares market in its emerging markets indexes, amid concerns by some big global money managers that getting access to that market remained too difficult.
In the past month or so there have been signs that China’s gatekeepers are ready to open the doors to the country’s capital markets wider.
On March 26, China’s State Administration of Foreign Exchange granted Fidelity Investments Management (Hong Kong) Ltd. an additional $800 million in quota capacity.
On top of previous quotas of $400 million, the latest installment lifted Fidelity’s combined total to $1.2 billion, making the firm the first asset management company with a QFII quota of more than $1 billion, said Mark Talbot, Hong Kong-based managing director, Asia-Pacific ex-Japan, with Fidelity Worldwide Investment, in a statement.
At $200 million more than any prior single award to a money manager in the 12-year life of China’s qualified foreign institutional investor program, the size of the latest quota for Fidelity was likewise significant, said Charles Salvador, director, investment solutions with Z-Ben Advisors, a Shanghai-based consultancy on financial market business opportunities in China.
Through a spokeswoman, Mr. Talbot declined to say if the latest hefty award had affected Fidelity executives’ views on whether MSCI and other benchmark index providers should begin including A shares in their indexes.
The big QFII award to the money manager, in a program designed to favor overseas institutional investors, hasn’t been the only recent sign of increasing flexibility in providing access to foreign investors. Also on March 26, SAFE’s latest monthly update of the country’s renminbi qualified foreign institutional investor program showed KKR & Co.’s Singapore affiliate becoming the first private equity firm to garner a quota, of 3.5 billion renminbi ($570 million).
And in February, GIC Ltd., the Singapore sovereign wealth fund, became the first asset owner to be granted an RQFII license by the China Securities Regulatory Commission. The program previously had focused on providing money management firms with access to domestic capital markets.
In a telephone interview, Chia Chin Ping, Hong Kong-based managing director of MSCI's Asia-Pacific research, welcomed the signs of increasing flexibility on the part of China’s regulators, while noting the critical importance that quotas be tied to underlying demand rather than being constrained by arbitrary limits.
The latest Fidelity news, which effectively eliminated a long-standing $1 billion barrier for money managers, could prove to be the start of an aggressive acceleration in QFII quota awards, said Z-Ben’s Mr. Salvador. He predicted the program, which has extended $72.2 billion in quotas in its first 12 years, could reach its $150 billion ceiling by the end of the year — a pace that would presuppose monthly awards of almost $9 billion for the remainder of the year.
Mr. Chia declined to speculate whether MSCI would or wouldn’t choose in June to add an initial sliver of A shares to its emerging markets indexes at the start of 2016. Roughly $1.7 trillion in institutional money around the globe is benchmarked to those indexes.
While the initial 5% slice of the A-shares market considered for inclusion a year ago would have amounted to only 60 basis points of the MSCI emerging markets index, or $10.2 billion, the market has rallied strongly since then, even as emerging markets in general have struggled.
Since June 30, the Shanghai Stock Exchange has surged 85%, which leaves a 5% portion of China’s A-shares market accounting for 93 basis points of the MSCI emerging markets index, according to MSCI’s estimates. At $1.7 trillion, that would call for quotas of $15.8 billion.
