China overlooked again in MSCI review

Index provider MSCI has once again ruled not to add Chinese mainland-listed equities, A-shares, to its Emerging Markets index, providing a setback to the Chinese authorities' plan to welcome international capital flows.

The decision, resulting from the index provider's annual review, was a surprise to many commentators. Investment bank Goldman Sachs recently claimed the likelihood of MSCI including A-shares in the Emerging Markets index in this review was 70%. 

MSCI hinted it may include A-shares in the Emerging Markets index in an “off-cycle” decision before next year's review announcement, in June 2017, but made no promises.

“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 managing director and global head of research.

Among the sticking points highlighted by MSCI was China's 20% monthly limit on repatriations, which could inhibit fund providers from meeting client redemption requests.

MSCI also remarked that local exchanges' pre-approval restrictions on launching new financial products, “remain unaddressed”. These rules require, for instance, exchange-traded funds (ETFs) based on indices that track A-shares to be approved by China even if they are listed offshore, a provision MSCI previously stated was “unique among emerging markets”.

Market participants also seem to be concerned about the revival of trading suspensions such as the “circuit breakers” the Chinese authorities activated in January. China has announced measures to restore faith in the markets and reduce the number of suspended stocks but investors need “a period of observation” to assess whether these efforts are effective, said MSCI.

Besides these points, market participants need time to assess whether new policies on capital mobility and quota allocation were effective, said the index provider.

On a positive note, MSCI decided to move Pakistan from being a frontier market to an emerging market. The country will rejoin the Emerging Markets index, from which it was downgraded in 2009, in May 2017.

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