MSCI delays adding Chinese stocks to emerging markets index

Global stock benchmark provider MSCI has decided to delay including stocks listed in mainland China in its widely followed Emerging Markets Index, saying China has to take further steps toward making its market more accessible and closer to international standards.

MSCI said Tuesday that while Chinese authorities have introduced significant improvements in the accessibility of the yuan-denominated “A-shares” market, global investors want to see more progress.

“International institutional investors clearly indicated that they would like to see further improvements in the accessibility of the China ‘A-shares’ market before its inclusion in the MSCI Emerging Markets Index,” said Remy Briand, MSCI’s managing director and global head of research.

The company did not rule out a potential decision on the matter sometime before June 2017, if more progress is made.

“This is certainly a setback for Beijing,” said Jack Ablin, chief investment officer, BMO Private Bank in Chicago. “China has to allow this market to float a little bit more freely.”

China’s “A-shares” market has mostly been open only to Chinese investors. If companies trading in that market were to be listed on MSCI’s index, that would attract more foreign investment to the Chinese firms as fund managers rebalance their portfolios.

And given the $10.5 trillion invested in funds benchmarked to MSCI, such a move could also lead to more individual investors having ownership of stocks from mainland China. That could carry risks since the country’s once-booming economy has been slowing and its markets have been volatile over the past year.

Among institutional investors’ lingering concerns about China’s “A-shares” market is a limit on the monthly outflows of money in China.

“It’s about getting money in and out of China,” said Quincy Krosby, a market strategist at Prudential Financial. “It’s been a grey area. It needs to be clarified, codified, so particularly institutional investors can feel confident there’s liquidity in the market.”

MSCI, which reviews its indexes twice a year, also delayed the inclusion of China’s “A-shares” last summer. At the time, the Chinese stock market had entered a steep slide that led at one point to roughly half the stocks being suspended from trading. The situation also prompted a flurry of measures by Beijing to stabilize the markets.

The latest delay came as a disappointment to Yu Zhang, portfolio manager of the Matthews China Dividend Fund.

Still, Zhang said he understood the reasoning behind MSCI’s decision, but was optimistic China’s “A-shares” market would eventually be included in the MSCI index.

“For two years MSCI has come back with additional requirements for Chinese regulators,” Zhang said. “We feel this inclusion is more of a question of when; it’s not a question of if.”

MSCI, originally known as Morgan Stanley Capital International, provides a range of global stock indexes that professional investors track to measure their performance. The indexes are the basis for exchange-traded funds.

The index has more than 800 stocks in 23 countries. China already represents about a quarter of the index, a far bigger share than any other country. The Emerging Markets Index is down nearly 18 per cent over the 12 months ended May 31.