Wait at the door

Even though A shares have yet to gain en­try into global in­dexes, in­vest­ment banks are con­fi­fi­dent that con­tin­ued fi­fi­nan­cial lib­er­al­iza­tion on the Chi­nese main­land will soon make their in­clu­sion a re­al­ity. Oswald Chan re­ports.

China Daily (Canada) - - FRONT PAGE -

Global eq­uity in­dex provider MSCI (Mor­gan Stan­ley Cap­i­tal In­ter­na­tional) at its June meet­ing de­ferred the in­clu­sion of A shares in its Emerg­ing Mar­kets (EM) In­dex, the sec­ond time it did so within a year.

The de­ci­sion was at­trib­uted to con­cerns over the quota al­lo­ca­tion process, cap­i­tal mo­bil­ity re­stric­tions and ben­e­fi­cial own­er­ship of in­vest­ments.

“Be­cause MSCI’s client base is so large and di­verse, we have a strong in­ter­est in en­sur­ing that re­main­ing is­sues are ad­dressed in an or­derly and trans­par­ent way,” said Remy Briand, man­ag­ing di­rec­tor and global re­search head at MSCI. “Sub­stan­tial progress has been made to­ward the open­ing of the Chi­nese eq­uity mar­ket to in­sti­tu­tional in­vestors,” he noted.

“A shares will re­main on the 2016 re­view list for po­ten­tial in­clu­sion in the MSCI EM In­dex,” a state­ment from MSCI noted. “The im­mi­nent launch of the Shen­zhen-Hong Kong Stock Con­nect pro­gram and po­ten­tial fur­ther lib­er­al­iza­tion of the QFII (Qual­i­fied For­eign In­sti­tu­tional In­vestor) pro­gram should fur­ther im­prove the ac­ces­si­bil­ity of the A-share mar­ket.”

The global eq­uity in­dex provider added that it may an­nounce a de­ci­sion on A-share in­clu­sion as soon as the is­sues out­lined are re­solved. This may hap­pen out­side the reg­u­lar sched­ule of its an­nual Mar­ket Clas­si­fi­ca­tion Re­view.

MSCI and the China Se­cu­ri­ties Reg­u­la­tory Com­mis­sion will form a work­ing group to con­trib­ute to the suc­cess­ful res­o­lu­tion of these is­sues.

“We look for­ward to a fruit­ful col­lab­o­ra­tion that will con­trib­ute to the fur­ther open­ing of the A-share mar­ket to in­ter­na­tional in­vestors and its in­clu­sion in the MSCI EM In­dex,” Briand added.

“We be­lieve that the Chi­nese author­i­ties un­der­stand these is­sues and in­tend to re­solve them quickly. We will con­tinue to work closely with the Chi­nese gov­ern­ment as it takes fur­ther steps to im­ple­ment poli­cies,” fund man­ager Black­Rock said in a state­ment.

A shares re­fer to stocks of Chi­nese com­pa­nies traded on the Shang­hai or Shen­zhen stock ex­changes, quoted in ren­minbi and gen­er­ally only avail­able for pur­chase by main­land cit­i­zens. For­eign in­vest­ment is only al­lowed through the twin, tightly reg­u­lated QFII or Ren­minbi Qual­i­fied For­eign In­sti­tu­tional In­vestor (RQFII) pro­grams.

“We have noted that se­cu­ri­ties on the Shen­zhen Stock Ex­change are not cov­ered in this pro­gram (that is, not el­i­gi­ble for re­cip­ro­cal trad­ing be­tween Hong Kong and main­land), and this is po­ten­tially an is­sue for us in con­sid­er­ing the in­clu­sion of A shares into our stan­dard global uni­verse,” Shirley Low Wan Boen, head of Asia Pa­cific at global in­dex provider STOXX, told China Daily.

STOXX, owned by the Ger­man Deutsche Borse Group and Swiss SIX Group, cur­rently does not in­clude A shares in its global and re­gional stan­dard in­dexes. How­ever, it does have three in­dexes de­voted ex­clu­sively to main­land stocks, namely, STOXX China A 50, STOXX China A 50 Equal Weight and STOXX China A 900.

“One of the key ob­sta­cles go­ing against the in­clu­sion (in global in­dexes) is that in­ter­na­tional in­vestors can­not ac­cess Shen­zhen-listed shares, which rep­re­sent 41 per­cent of the to­tal A-share mar­ket cap­i­tal­iza­tion,” Gold­man Sachs said in its re­search re­port.

“If the Shen­zhen-Hong Kong Stock Con­nect could be un­veiled in the near fu­ture and be up and run­ning in the fourth quar­ter this year, a key pre­req­ui­site for A-share in­clu­sion in global in­dexes would be ful­filled, and could open a spe­cial re­view by the MSCI in our view. A-share in­clu­sion by the MSCI in the fourth quar­ter this year is still on the cards,” the Gold­man Sachs re­port added.

While the New York-based MSCI once again de­ferred the in­clu­sion of A shares in its EM In­dex, Lon­don-based in­dex provider FTSE (Fi­nan­cial Times Stock Ex­change) Group in late May said it will in­clude A shares in its two tran­si­tional emerg­ing mar­kets in­dexes be­fore de­cid­ing at its Septem­ber meet­ing whether to add A shares in in­dexes tracked by global fund man­agers.

FTSE’s new gauges, the FTSE Emerg­ing Mar­kets China A In­clu­sion In­dexes, will have one rank­ing for all-cap­i­tal­iza­tion stocks and another for large- and mid-cap shares.

A-share weight­ing in these two tran­si­tional in­dexes will in­crease when in­sti­tu­tional in­vestors re­ceive or in­crease their RQFII or QFII al­lo­ca­tions.

The ini­tial weight­ing of A shares in the FTSE Emerg­ing Mar­kets China A In­clu­sion In­dexes will be 5 per­cent and is ex­pected to in­crease to 32 per­cent (as at March 31 mar­ket val­ues) when the shares be­come fully avail­able to in­ter­na­tional in­vestors. That will re­sult in Chi­nese stocks (in­clud­ing B shares, H shares, P Chips and Red Chips) mak­ing up 50 per­cent of the FTSE Emerg­ing Mar­kets In­dex, ac­cord­ing to a state­ment from FTSE.

“The two new A-share in­clu­sion in­dexes will merge seam­lessly with the stan­dard FTSE Emerg­ing Mar­ket in­dexes when A shares fully meet FTSE’s coun­try clas­si­fi­ca­tion cri­te­ria for emerg­ing mar­kets,” the state­ment added. “Within two to three years, A shares will be­come el­i­gi­ble for in­clu­sion in FTSE’s global in­dexes.”

“The tran­si­tion to in­clude A shares in global port­fo­lios is now be­gin­ning and we will sup­port this tran­si­tion while en­sur­ing that all users of our global bench­marks have suf­fi­cient time to man­age the change,” FTSE Rus­sell Chief Ex­ec­u­tive Mark Make­peace said.

De­spite China mak­ing sub­stan­tial progress in cap­i­tal mar­ket re­forms (ex­pan­sion of the RQFII pro­gram, launch of the Shang­hai-Hong Kong Stock Con­nect, and the clar­i­fi­ca­tion of cap­i­tal gains tax, for in­stance), the A-share mar­ket still has sev­eral lim­i­ta­tions that tend to make global fund man­agers balk. MSCI first de­clined to in­clude A-shares in MSCI EM In­dex in June last year.

Ac­cord­ing to MSCI, global in­vestors are con­cerned whether they can re­li­ably ac­cess the A-share quota through a more stream­lined, trans­par­ent and pre­dictable al­lo­ca­tion process, should they need suf­fi­cient flex­i­bil­ity and as­sur­ance to se­cure ad­di­tional quota.

Another is­sue is in­vest­ment liq­uid­ity, with some in­vestors con­tin­u­ing to ex­press con­cerns about re­stric­tions on cap­i­tal lock-up and lim­its on the repa­tri­a­tion amount when they take profit in the A-share mar­ket.

Newspapers in English

Newspapers from China

© PressReader. All rights reserved.