MSCI: A-share inclusion “not a compromise”
Index provider MSCI came in for criticism in late June for relaxing certain conditions to enable a partial, inclusion of Chinese stocks in its emerging-market benchmarks.
But Chia Chin-Ping, the company’s Asia-Pacific research head, has defended the move during an interview with AsianInvestor. “The inclusion of A-shares is not a compromise on issues that we highlighted in previous consultations,” he said. “There are positive developments behind it.”
Chia was keen to stress the importance of a gradual process that would give investors the time they needed to make the operational changes required for trading onshore Chinese equities.
Employing a 5% “inclusion factor”, MSCI said on June 21 it would admit 222 A-share large-cap stocks rather than the previously indicated 448.
Daniel Morris, senior investment strategist at BNP Paribas Asset Management, told AsianInvestor at the time: “[MSCI] scaled back the ambitions quite a bit, so [the inclusion] really more of symbolic significance than a practical one in terms of the performance of the index. It makes it easier for them to include China, because it’s going to be less significant in terms of how it will affect portfolio investors.”
However, said Chia, by introducing 448 shares to MSCI’s 850-stock emerging-market portfolio, “you are adding more than half”. That means investors would need to research 400 names, he added, which they may have felt would be too challenging to manage right from the beginning.
Slow and steady...
Ultimately, explained Chia, to access China via the Stock Connect trading link, investors need time to set up their internal processes with brokers, custodians and other partners.
Moreover, it is very important that investors are happy with the experience, particularly in respect of the initial inclusion, he added, in order to boost confidence in increasing exposure to China.
And one of the single biggest concerns for global investors is that Beijing could potentially impose capital controls on money invested in the market – understandably, given the restrictions imposed in the past year and more.
But the question of A-share inclusion also comes down to the removal of the Stock Connect daily trading limit, said Chia.
When accessing a market, investors might buy stocks or gain exposure via funds or ETFs, he noted, “so when there is a pre-approval requirement on financial products, it becomes very problematic”.
Mainland authorities are aware of this issue, he noted. “We worked very closely with Chinese regulators and local exchanges, and came to an alignment that removes most of the pre-approval requirements for financial products.
“That highlighted the desire of China's opening up of its capital market, and to align with international standard and practices.”
Look out for the second in this two-part series, in which MSCI's Chia will look ahead to the next steps the index provider is considering in respect of A-share inclusion.
AsianInvestor will host its 4th China Global Investment Forum in Beijing on September 21. Click on the link for more details.