Global index compiler MSCI on Tuesday again rejected including Chinese mainland-listed "A-shares" from its prominent emerging markets index.
"International institutional investors clearly indicated that they would like to see further improvements in the accessibility of the China A-shares market before its inclusion in the MSCI Emerging Markets Index," Remy Briand, MSCI managing director and global head of research, said in a statement.
MSCI said that it would retain the option to include the A-shares as part of its next market classification review in 2017. MSCI will monitor the implementation of the recently announced policy changes and will seek feedback from market participants," Briand said.
The MSCI decision means A-shares, or stocks in Shanghai and Shenzhen that are denominated in yuan, won't be included in the widely-used emerging markets index which has about $1.5 trillion of assets benchmarked to it. Asset managers, pension funds, insurers and individual investors hold passive investments like an exchange-traded fund (ETF) or mutual fund that track an MSCI index like emerging markets.
Chinese stocks now listed in MSCI's emerging market index are all traded in either Hong Kong or the US. That means the world's second-largest economy makes up only about one-fourth of the benchmark index, while projected full inclusion of A shares would bring that ratio to more than one-third.
In June 2015, MSCI rejected the Chinese shares, citing uncertainty about who actually owns them and how easily investors can withdraw their money from Chinese investments. Earlier this year China's stock exchanges published rules that restrict arbitrary trading suspensions for Chinese stocks. Chinese officials have been pushing for the inclusion of A-shares, seeing it as another step in the assimilation of China into the global financial marketplace.
Qi Bin, an official with the China Securities Regulatory Commission, said improvements to the trading-halt system were part of Chinese government's efforts to facilitate MSCI inclusion. He also cited freer money transfers allowed by the foreign exchange regulator and greater recognition of beneficiary ownership.
Briand acknowledged that "there have been significant steps toward the eventual inclusion of China A shares in the MSCI Emerging Markets Index."
MSCI said it gathered feedback from market participants on the potential inclusion of the A-shares in the index.
Investors recognized the actions taken to further open the China A-shares market and highlighted that the topic of beneficial ownership has been satisfactorily resolved, said the MSCI statement.
They generally stressed the need for a period of observation to assess the effectiveness of the QFII quota allocation and capital mobility policy changes as well as the effectiveness of the new trading suspension policies.
"The 20 percent monthly repatriation limit remains a significant hurdle for investors that may be faced with redemptions such as mutual funds and must be satisfactorily addressed. Finally, the local exchanges' pre-approval restrictions on launching financial products remain unaddressed. MSCI will retain the China A shares inclusion proposal as part of the 2017 Market Classification Review. MSCI does not rule out a potential off-cycle announcement should further significant positive developments occur ahead of June 2017," said MSCI.
