MSCI delays inclusion of China A-shares in its EM Index

Global equity indexes provider MSCI announced Tuesday that it will delay including China A-shares in the MSCI Emerging Markets (EM) Index.

In its 2016 market classification review released Tuesday, MSCI said that Chinese authorities have introduced significant improvements in the accessibility of the China A-shares market for global investors in recent months, but "investors would like to see further improvements in the accessibility of the China A-shares market before its inclusion."

The completed improvements, which touched the major issues previously cited as obstacles to inclusion last year, include issues regarding beneficial ownership, enhanced regulations on trading suspension and QFII (Qualified Foreign Institutional Investor) policy changes aimed at addressing quota allocation and capital mobility restrictions, according to the review.

Foreign investors are allowed to participate in China's onshore stock market through quota-based projects including qualified programs such as QFII and RQFII, which allows institutions to raise renminbi from the offshore market to invest in China.

Chinese authorities have relaxed capital flow restrictions for QFII and RQFII funds and simplified the quota application and granting process. It has also launched the Shanghai-Hong Kong Stock Connect in late 2014 to expand access without quota restrictions.

A similar connect linking the bourses in Shenzhen and Hong Kong is expected some time this year, further expanding overseas investor exposure to China's onshore stock market.

"There have been significant steps toward the eventual inclusion of China A-shares in the MSCI Emerging Markets Index," said Remy Briand, MSCI Managing Director and Global Head of Research. "They demonstrate a clear commitment by the Chinese authorities to bring the accessibility of the China A-shares market closer to international standards."

Meanwhile, international investors are calling for change, namely on the 20-percent monthly repatriation limit and the local exchanges' pre-approval restrictions on launching financial products.

MSCI said it will retain the China A-shares inclusion proposal as part of the 2017 Market Classification Review and it won't rule out a potential off-cycle announcement, should further significant positive developments occur ahead of June 2017, the review said.

"We do see that the A-share market will definitely join the MSCI Emerging Markets Index eventually. It is something which a lot of investors want, that MSCI would want...Various entities, regulatory bodies in China also want international investors to access the market," said Briand during a press conference via phone on Tuesday.

In response, China Securities Regulatory Commission (CSRC) said a global stock index without Chinese A-shares is incomplete.

CSRC said the decision by MSCI will not affect the opening-up or reform of China's capital market, adding that China needs to continue to build a stable and healthy capital market.

(APD)