Four factors affecting China’s promotion to emerging market

Emerging markets signChina’s progress towards gaining ‘emerging market’ status for its shares is to be heavily influenced by how happy institutional investors are with market changes.

MSCI is to seek feedback from investors as it resumes discussions about whether to include a certain amount of Chinese A-shares into its MSCI Emerging Market Index.

The index provider wants feedback on the effectiveness of changes to the Qualified Foreign Institutional Investor (QFII) regime that sought to address constraints on investor access because of QFII quotas, as well as restrictions on capital movement.

“It is critical for MSCI to obtain informed feedback from international institutional investors who have already tested the effectiveness of the changes in the China A-Shares market,” MSCI says.

Secondly, China’s entry to the emerging markets index has been affected also by uncertainties surrounding beneficial ownership for asset owners who delegate investment and operational decisions to fund managers.

A third factor is China’s ability to calm international investors’ concerns about liquidity risks following the market suspensions of 2015 and 2016 when Chinese shares witnessed a large sell-off. Investors want Chinese authorities to implement measures that would prevent this happening again, said MSCI.

The fourth, and unique, factor affecting China’s admittance to the index is the “anti-competitive clauses” that require exchange-traded funds – and other products linked to indices containing China A-shares – to be pre-approved by local Chinese stock exchanges, even if listed internationally. This is not market practice elsewhere in the world.

“This issue may become a roadblock to the inclusion of China A-shares in the MSCI Emerging Market Index if not addressed by the local Chinese stock exchanges,” said MSCI.

MSCI is only considering the partial inclusion of China A-shares in its index – specifically limited to 5% of free-float A-shares, adjusted for market capitalisation.

A decision will be announced in June 2016.

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