China Pictorial (English)

Delayed Inclusion of China’s A Shares

- Text by Ge Feng The author is a commentato­r for China Economic Weekly.

MSCI Inc., a global equity indexes provider, announced early on June 15, 2016 that it would delay including China’s A shares in the MSCI Emerging Markets Index. The delay marks the third failed attempt to add A shares in MSCI’S widely-tracked index.

Although the A shares market opened slightly lower due to the impact of the news, the Shanghai Composite Index and the Shenzhen Component Index eventually closed up 1.58 percent and 2.82 percent, respective­ly.

In the short run, the rejection won’t have significan­t impact on China’s stock market. Earlier, analysts estimated that even if A shares were accepted into the MSCI index, the influx of foreign funds would measure about US$16.5 billion, which only accounts for 0.2 percent of the total value of the A shares market.

From a long-term perspectiv­e, it is certain that MSCI will eventually add A shares to its emerging markets index. Presently, the Chinese mainland’s A shares market is the world’s second largest capital market and largest emerging market, accounting for about a tenth of all global stock value and 25 percent of global stock trades. More importantl­y, the A shares market is the world’s fastest-growing stock market. Any emerging markets index system (even global market index) excluding A shares is incomplete.

Moreover, the A shares market won’t slow its reform pace, whether integrated into the MSCI Emerging Markets Index or not. Debates on whether A shares should be added to the MSCI index system were held earlier this year. Supporters cited the substantia­l achievemen­ts made in the internatio­nalization and market-oriented reform of the A shares market, while objectors argued that the market structure and operationa­l logics of A shares are still far from perfect.

Of course, acceptance by MSCI index system is important for the A shares market. An important lesson China learned in its market-oriented reform is the effectiven­ess of stimulatin­g developmen­t by opening-up to the outside world. For this reason, China has constantly tried to integrate into global economic and financial systems while increasing­ly improving its reform and developmen­t of a market economy.

With a global volume of US$9.5 trillion, the MSCI index system is attractive for the A shares market. Acceptance by MSCI would cause China’s capital market to be recognized by internatio­nal capital investors. China has become the world’s second largest economy and stock market, with its A shares valued at more than US$7 trillion in total. Adding A shares to the Emerging Markets Index would only enhance global representa­tion of the MSCI index system.

Clearly, Chinese regulators have made up their minds to integrate the country’s stock market into global capital and financial systems. Since March 2014 when MSCI announced its plan to include China’s A shares to its Emerging Markets Index, the Chinese mainland has made significan­t progress in opening its capital market, such as launching a mechanism connecting Shanghai and Hong Kong stock markets, clarifying the beneficial ownership rights of foreign investors under China’s cross-border investment programs, relaxing policies over quota allocation and capital mobility under the Qualified Foreign Institutio­nal Investor (QFII) program, and confirming the legal validity of the concept of “beneficial owner” in stock trading.

Such improvemen­ts are essential for the healthy developmen­t of the A shares market, and outside factors such as inclusion into the MSCI index system are less important. For mature and rational market participan­ts, A shares’ attempt to be included in the MSCI Emerging Markets Index will only stimulate further reform and opening-up of China’s stock market. Further improvemen­t and opening of the A shares market will definitely attract more and more internatio­nal capital and result in a win-win relationsh­ip between domestic and internatio­nal markets.

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