MSCI Inc. on Tuesday announced it will delay including China's Shanghai- and Shenzhen-listed A shares in its global emerging markets benchmark indexes, despite considerable progress by China's regulators over the past year in improving access to the country's market.
The latest annual review of MSCI's benchmark index constituents marks the third year in a row that the New York-based firm didn't follow through on a proposal to begin adding China A shares to its indexes.
Remy Briand, MSCI managing director and global head of research, welcomed the progress China's authorities had made, and said in a news release, “we look forward to the continuation of policy momentum in addressing the remaining accessibility issues.”
The MSCI news release cited lingering concerns among international institutional investors for the decision to delay inclusion for now.
For the second year in a row, however, the firm left open the possibility that A shares could win inclusion ahead of next year's review, should “further significant positive developments occur” in the interim.
Of four issues MSCI highlighted as needing to be resolved when it launched its latest annual review two months ago, one — uncertainties surrounding the beneficial ownership rights of foreign owners of A shares — was adequately addressed by China's regulators in May. “MSCI considers this question to be resolved,” the news release said.
But a second issue, surrounding restrictions under China's qualified foreign institutional investor program, has not been resolved, despite recently announced concessions, MSCI said.
Institutional investors have yet to see QFII reforms announced by regulators in February — aimed at improving quota access to local markets and allowing for daily capital repatriation — translated into action, and “positive experiences … are critical for (those investors) in supporting inclusion in the MSCI Emerging Markets index,” the news release said.
On the same topic, a QFII restriction that hasn't been addressed — a monthly repatriation limit of 20% of their “prior-year net asset value” — remains a considerable sticking point, MSCI said. That obstacle “must be removed or substantially increased with a shorter repatriation horizon; otherwise, the effectiveness of the QFII channel would be significantly reduced,” the news release said.
Likewise, investors need time to gauge the impact of new regulations in China issued over the past month, limiting the scope for listed companies to suspend trading in their shares, the company said. The issue came to prominence only in the second half of 2015, when more than 1,000 companies listed in Shanghai or Shenzhen suspended trading amid a market sell-off that sheared more than 40% from benchmark indexes.
A fourth issue — the demand by Chinese stock exchanges that they preapprove any financial product linked to indexes that include China A shares — remains a regulatory bridge too far, according to the MSCI news release.
Calling the breadth of such restrictions “unique in emerging markets,” the news release said, “a vast majority of investors said that alignment to international norms and satisfactory resolution of this issue is essential if they are to include A shares in their investment opportunity set.”
Kristin Meza, MSCI's New York-based spokeswoman, couldn't immediately be reached for comment.