Gap between China and global asset bosses

MSCI’s latest attempt to bridge the gap between China and global asset managers involves whittling down the number of shares that index-tracking investors may be forced to own by more than half.

Only 169 mainland Chinalisted companies will be considered for inclusion by benchmark gauges, down from 448 under a previous proposal, and all will be large-cap shares currently accessible to foreign investors through exchange links with Hong Kong.

The weighting of yuan denominated stocks, known as A shares, would be just 0.5 percent of the MSCI Emerging Market Index, half the previous suggested level, according to a consultation paper published on MSCI’s website on Wednesday.

MSCI is surveying stakeholders for the fourth time on the merits of having members of China’s $7 trillion (R88.44trln) equity market in its benchmark indexes. Previous efforts have foundered on concerns over issues such as repatriation limits and excessive trading suspensions.

With Chinese officials signalling they’re in no rush to meet the last of the index compiler’s demands, MSCI’s less ambitious proposal has increased the chance of success, analysts said.

“It bodes well for the possibility of A-share inclusion,” said Chen Li, Hong Kong based strategist with Credit Suisse Group. The likelihood of this happening in June has risen to “40 percent compared with earlier 20 percent,” given it’s “unlikely” China will lower capital controls for this, Chen said.

Calculations

Under the latest proposal, the offshore yuan will be used for index calculations, rather than the onshore currency as previously suggested. To address investor concerns over the relatively high number of A-share suspensions, stocks that have been halted for more than 50 days in the past 12 months wouldn’t be eligible, according to the statement.

“This move will enhance the possibility for A-share inclusion,” said Paul Pong, managing director at Pegasus Fund Managers in Hong Kong.

“Previously one major concern was that it might be difficult to pull money out in a timely fashion.”

MSCI, compiler of one of the world’s most followed emerging-market indexes, said last year it will reconsider adding Chinese domestic shares in its 2017 review.

The rejection surprised analysts at many major banks, including Goldman Sachs Group and Citigroup.