De­layed In­clu­sion of China’s A Shares

China Pictorial (English) - - Express | Comment - 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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