MSCI BLOCKS CHINA SHARES AGAIN IN BLOW TO XI

Money & Markets,

Shanghai/New York, June 15: China’s domestic equities were denied entry into MSCI’s benchmark indexes for a third time, a setback for President Xi Jinping’s efforts to raise the profile of mainland markets and tur n the yuan into an international currency.

Policy makers need to make additional improvements to the accessibility of the A share market, according to a statement from the index compiler on Tuesday. MSCI, whose emerging-market index is tracked by investors with $1.5 trillion in assets, said it will reconsider inclusion in its 2017 review, while not ruling out an earlier announcement.

China was rejected despite a flurry of measures this year to address MSCI’s concerns, including curbs on arbitrary trading halts and looser restrictions on cross-border capital flows. The decision suggests international investors are still uncomfortable putting their money in the $6 trillion market after a botched gover nment campaign to prop up share prices roiled global equities last year.

While Chinese authorities have demonstrated a commitment to opening the market, “investors clearly indicated that they would like to see further improvements in the accessibility,” Remy Briand, MSCI’s global head of research, said in the statement.

Investors need time to assess the effectiveness of recent policy changes on quota allocations, capital mobility and trading suspensions, the index provider said. MSCI also pointed out that a 20% monthly repatriation limit remains a “significant hurdle” for investors that may be faced with redemptions. Local exchanges’ pre-approval restrictions on introducing financial products also “remain unaddressed,” MSCI said.

“The MSCI decision signals that China remains a closed emerging economy that uses market techniques like freezing the market and making it illegal to short, using government funds to buy shares — techniques that are not welcome among global investors,” Paul Christopher, head global market strategist at Wells Fargo Investment Institute, said by phone.

MSCI’s ruling won’t affect the nation’s capital market reforms, Deng Ge, a spokesman for the China Securities Regulatory Commission, said in a statement on the regulator’s website. Indexes that don’t contain A shares are incomplete, according to the statement.

The Shanghai Composite Index fell as much as 1.1% on Wednesday. The yuan erased declines after slipping to a fiveyear low. The Deutsche X-trackers Harvest CSI 300 China AShares ETF, the biggest US-listed exchange-traded fund tracking mainland stocks, fell 2.3% in after-market trading on Tuesday.

The outcome of MSCI’s decision had divided forecasters. Among the 23 strategists surveyed by Bloomberg in May, 10 had predicted entry, while five forecast a rejection and eight said it was too close to call. The Shanghai Composite Index dropped 2.9% during the past two days, extending this year’s slump to 20%, as traders braced for a potential exclusion.

Despite MSCI’s rejection, China’s combination of size and improved access makes the market hard to ignore for many investors. Mainland-listed shares account for about 9% of the world’s equity capitalization, data compiled by Bloomberg show, and the nation’s economy has been by far the biggest contributor to global growth in recent years. The $36 billion Vanguard FTSE Emerging Markets ETF, which tracks indexes compiled by an MSCI competitor, already invests in domestic Chinese shares.

China was rejected despite a flurry of measures this year to address MSCI’s concerns, including curbs on arbitrary trading halts and looser restrictions on cross-border capital flows