The Strategist

MSCI did not fulfill hopes of Chinese businessmen

06/15/2016 - 16:41

MSCI Index Provider has not included shares of mainland Chinese companies (class A) in MSCI Emerging Markets (an index for the emerging markets). This step came as a surprise to investors and Chinese companies, as they have waited a year, writes Wall Street Journal. A positive decision could lead to tens of billions of dollars-worth injection in the Chinese companies’ shares, since global funds with assets of $ 1.5 trillion use MSCI Emerging Markets as a benchmark.

Aaron Goodman via flickr
Aaron Goodman via flickr
"International institutional investors have clearly indicated that they would like to see further improvement in availability of Class A stock market before it could be included in MSCI Emerging Markets index», - explained Remy Briand, Global Head of Research at MSCI.

Now, the index includes shares of Chinese companies traded abroad and in Hong Kong. For the third consecutive year, MSCI has refused to include shares of mainland Chinese companies in the index. Since then, the Chinese government has carried out significant reforms in the financial market. In particular, they have established a three-month period during which trading of shares may be suspended (previously the term was not restricted). The authorities also banned foreigners from withdrawing more than 20% of funds invested in shares per month. 

MSCI explains that investors need more time to evaluate the reforms. A year ago, MSCI’s refusal to include shares of mainland China companies in the index brought their price down by 40%. Today, the Shanghai Stock Exchange A Share Index has risen by 1.5%.

According to J.P. Morgan Securities’ calculations, foreigners now own 1.3% Chinese shares and 1.6% bonds on the mainland market; the total investment amounts to "paltry" $ 180 billion.

MSCI has initiated a new process of revising the parameters of Chinese category A stocks in the following year. It was noted that if index provider notes significant progress on the current problems, it may make a special "extraordinary" statement regarding Chinese stocks of category A - before the official review in June 2017.

According to market observers and analysts, the unfavorable decision, taken for the third consecutive year, underscores doubts of global investment organizations in shares denominated in yuan. The investors are not sure in obligations and Beijing’s ability to carry out a reform of capital markets.
"The decision underlines an increasingly important problem, namely, the reluctance of global investors to invest in assets denominated in RMB, despite the fact that China is the second largest stock market and the third largest bond market in the world", - said Peter Alexander, Head of investment consulting firm Z-Ben Advisors.