MSCI Defers China Inclusion as It Opts to Work With Regulator

(Bloomberg) MSCI Inc. held off from adding China’s mainland stocks to its benchmark indexes, opting to work with the nation’s securities regulator to overcome remaining obstacles to inclusion.

The index provider expects to put yuan-denominated stocks, also called A shares, in its global benchmarks after settling investor concerns about accessibility and share ownership through collaboration with the China Securities Regulatory Commission, according to a statement issued Tuesday. MSCI said a decision to include Chinese stocks may come at any time.

The possible addition of mainland equities to MSCI’s global indexes has been a divisive issue among fund managers. Even as China’s stocks more than doubled over the past year, foreigners have been cautious about entering a market where retail investors account for 80 percent of trading.

“Some might regard it as disappointing that it did not happen immediately,” Shane Oliver, head of investment strategy at AMP Capital Investors Ltd. in Sydney, which manages about $124 billion, said by phone. “By the same token, it looks like it’s going to happen anyway at some point, it’s just a question of when. They’ve just got some remaining issues to resolve.”

Chinese regulators have addressed some of the concerns that emerged from MSCI’s review last year over market access. They increased the quota under the existing Qualified Foreign Institutional Investor scheme and granted a “temporary” waiver on capital gains levies in November for stock purchases through the Shanghai-Hong Kong exchange link.

Remaining Issues

MSCI said in its statement that it will work with Chinese regulators to establish policies that “effectively resolve the remaining accessibility issues.” Those include giving investors access to quotas commensurate with the size of their assets under management, improvements in liquidity and further clarification of share ownership rules.

Brendan Ahern, the chief investment officer at Krane Fund Advisors, which manages a U.S. exchange-traded fund investing in Chinese domestically-listed shares, said some investors might have expected an immediate inclusion of A shares to the indexes.

“Short term, it’s a disappointment for some of us who would like to see them start the process sooner,” Ahern said by phone Tuesday. “But the trajectory is there. It’s telling asset managers, ‘You have to figure this out — this change is coming.’ I don’t believe the three issues they raised are insurmountable. They won’t wait until the 2016 review to include A shares. It will happen sooner.”

Stocks Surge

The benchmark Shanghai Composite Index has jumped 152 percent in the past 12 months, the most among major global benchmark indexes, spurred by record margin debt and prospects the central bank will add to cuts in interest rates to boost the economy. The gauge is valued at 25.6 times reported earnings, compared with a multiple of 13.9 for the MSCI Emerging Markets Index.

“At these valuations, investors are not likely to jump in and buy more of the A-share market,” Jorge Mariscal, the emerging-markets chief investment officer at UBS Wealth Management in New York, which oversees $1 trillion in invested assets, said by phone Tuesday. “The timing is a little uncertain and the requirements may not be fulfilled, as MSCI has made it conditional. It could be delayed until next year or even later.”

Mobius Buying

Templeton Emerging Markets Group’s Mark Mobius, who was against inclusion as recently as March, became the latest convert in May, saying his funds are now buying China’s shares. Five of nine global investors interviewed by Bloomberg last month said mainland shares were ready for MSCI’s global indexes.

China, through companies listed in Hong Kong, accounts for more than 25 percent of the emerging-market benchmark. It’s the biggest weighting in the gauge, followed by South Korea’s 15 percent and 13 percent for Taiwan, data compiled by Bloomberg show.

Minsheng Securities Co. estimates $7.8 billion will flow into A shares based on limited inclusion and $154.5 billion based on full inclusion in MSCI indexes.

MSCI also said Tuesday it’s monitoring the opening of Saudi Arabia’s equity market, consulting investors regarding a possible inclusion of the MSCI Saudi Arabia Index in the emerging-market benchmark. The index-provider also said it added Pakistan to the list for consideration for an upgrade to developing-nation status as part of the 2016 review.

by Kyoungwha Kim, Belinda Cao and Ye Xie

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