MSCI offers A-share flexibility over index inclusion

MSCI has offered China a more flexible timetable for inclusion of A shares in its global indexes, but admittance will be conditional on continued reform of markets.

While the index provider has been making a decision on A shares' inclusion every June, the firm's Asia managing director said if A shares do not get the green light next month, they may not have to wait until June 2016.

Investors appear to have little confidence that China will gain MSCI admittance next month, despite the urgency the Chinese authorities are placing on the market's entry into the mainstream of global indexing.

Qi Bin, director-general of the international affairs department at the China Securities Regulatory Commission (CSRC) said in March that the regulator was meeting 30 global institutional investors in the US in order to persuade them to support A-share inclusion in MSCI and FTSE benchmarks. “We want to attract foreign long-term liquidity to improve market structure,” said Qi.

Chia Chin-Ping, MSCI’s managing director and Asia head of research, laid out the terms for China in an interview with a Hong Kong newspaper yesterday.

It was worthwhile providing flexibility on the timetable for acceptance, he said, because A shares represented a huge market which has been providing greater access to foreign investors.

“The annual June to June timetable is to provide a high degree of transparency and predictability to market participants in the market classification process,” Chia said. He confirmed that consultations over China’s inclusion would be ongoing even after an announcement in June. “We do not rule out the possibility of making necessary adjustments to the process.”

This month, MSCI will review whether to add China’s A shares into various indexes, including standard country (MSCI China), regional (Asia-Pacific, AP including/excluding Japan) and international (All Country World index) benchmarks. The firm will announce the result in mid-June. But sell-side analysts and brokers expect MSCI to keep A shares waiting this year.

Kinger Lau, Hong Kong-based chief China strategist at Goldman Sachs, said in a research note, “we see this as a 50-50 chance event” this year, but “the conditional probability for next year’s inclusion could be close to 100%.” He made the conclusion after meeting regulators, industry participants, and index compilers.

Lau said one key reason counting against inclusion this year was that the Shenzhen-Hong Kong Stock Connect has not yet been announced. “Without an unobstructed access to a meaningful part of the Shenzhen universe, the accessibility issue will remain a key obstacle for inclusion,” Lau said.

The other concern is over the Shanghai-Hong Kong Stock Connect’s quota restrictions, where northbound daily trading is limited to Rmb13 billion ($2.09 billion). In addition, some foreign investors still harbour concerns over settlement, legal and compliance issues on the trading link.

David Rabinowitz, head of direct execution for Asia at UBS, said in a conference call last Thursday that “my personal view is that we will not see a positive announcement from MSCI in June and they will wait until Shenzhen is added [to Stock Connect].”

On the positive side, expansion of the qualified foreign institutional investor scheme, its renminbi equivalent (RQFII) and Stock Connect have improved foreign accessibility to A shares, while enhancements to the cross-border trading link have been made since its launch in November last year, Lau said. China’s political will and policy accommodativeness is strong, he added.

In deciding not to include A shares in its indexes last year, MSCI noted investors’ concern over capital gains tax uncertainty, a cumbersome quota application process, and capital remittance and lock-up periods under both the QFII and RQFII schemes.

It is a measure of the pace at which the market mechanism is evolving that MSCI is willing to show flexibility on the scheduling for inclusion.