A-SHARES: Never mind the volatility

Rice paddockIndex compiler MSCI vows that volatility won’t affect its decision on adding A-shares to the Emerging Markets index. George Mitton reports. The plummeting Chinese stock markets have alarmed investors this summer and caused knock-on effects across the globe. Some sceptical voices have even talked of a financial crisis in China. One organisation that isn’t losing its cool is MSCI. The index maker says the volatility seen this summer is not relevant for its decision on whether to add Chinese mainland-listed shares, A-shares, to its widely followed Emerging Market index. The only thing that could do that would be a change that made A-shares less accessible for foreign investors. And as yet, the Chinese authorities have not proposed such a move. THE DECISION
China A-shares have become progressively more accessible in recent years thanks to the various Chinese access schemes, such as QFII, RQFII and the Shanghai-Hong Kong Stock Connect. As a result, expectation has steadily risen that MSCI will add A-shares to its Emerging Market index. But MSCI has yet to do so. The latest anticlimax was in June, when the index maker announced in its yearly review that, once again, A-shares had yet to meet the accessibility requirements of its investors and would therefore not join the Emerging Markets index yet. The decision was seen as a cautious and perhaps sensible one. MSCI did hint that change was on the way. In a conference call to announce the results of the review, Remy Briand, MSCI’s managing director, said MSCI had formed a working group with the Chinese regulator, the China Securities Regulatory Commission (CSRC). The group would meet in person and on conference calls, he said, to resolve some of the remaining obstacles to A-shares joining the EM index. One of the obstacles, he said, was the daily volume
limit on the Shanghai-Hong Kong Stock Connect. “The total removal of the daily limit would be the best option, because the limit creates uncertainty,” he said. “Short of removing it, increasing it significantly would be a good thing.” Briand was keen to point out that the working group was “not a formal body”, though he said it was a clear sign of progress. He also hinted that the addition of A-shares to the EM index may take place outside of the regular schedule for index reviews, in which a decision is announced once a year, in June. THE HURDLES
What are the remaining hurdles to be overcome before A-shares can join the EM index? MSCI is concerned, fundamentally, with accessibility. Anything that makes the Chinese mainland stock market difficult to access, or which limits accessibility, counts against A-shares joining the index. As a result, the Chinese authorities’ habit of imposing quotas on almost all the access schemes available – QFII and RQFII are both built on a quota system – is causing the index maker to delay its decision. Nor is MSCI happy about the lack of transparency in the quota allocation process. There are some promising signs. The Chinese authorities are awarding more quotas than before and raising quotas for many investors. Some institutions, such as US-based Vanguard Group, have included A-shares in their index-tracking products, thanks to partnerships with MSCI’s rival FTSE Russell, which launched a ‘transitional index’ (which includes some A-shares) in June. A shares charts ©2015 funds europe

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