Index provider proposes smaller group of A-shares
The chances of MSCI Inc adding China-listed shares to its global index have risen significantly since it proposed to cut the number of companies to include, investors said, but capital controls and market access snags may still pose a hurdle.
New York-based index provider MSCI will announce in June if it will add yuan-denominated Chinese shares, or A shares, to its Emerging Markets Index, a move that could draw up to $400 billion into China stocks over the next decade.
MSCI last year declined for the third time to include those shares to the benchmark, tracked by about $1.5 trillion in assets, saying more had to be done to open up China's tightly-controlled market.
The index provider has now narrowed the gap between China and global asset managers by proposing a smaller list of stocks and confining them to large-cap companies accessible to foreign investors via a trading link with Hong Kong.
"Certainly, in terms of the challenges China poses with respect to equity market access, this proposal does go some way to addressing those concerns," said David MacKenzie, head of Asian equity management at Schroders.
BlackRock, which is MSCI's largest client, said in a statement that it was "supportive of" China A-share inclusion in global benchmarks but did not comment on the timeline or MSCI's new proposal.
MSCI said last June that China need to allow foreign investors to freely repatriate capital under its cross-border Qualified Foreign Institutional Investor investment program.
It also wanted the country to scrap a rule requiring foreigners to seek regulatory approval before launching investment products that include A shares, and said it wanted to see fewer long-term share suspensions.
Chinese regulators and benchmark providers have been in discussions for several years to smooth out market access issues, but they have reached a deadlock over the final hurdles, said two people briefed on the matter.
One of the people said MSCI was working around these issues by reducing the proposed selection of 448 stocks to 169.
"This is a bit of negotiation with the investors on one side telling MSCI what they want to see, and the Chinese regulators on the other side saying this is what they can offer," said Daniel Morris, senior investment strategist at BNP Paribas Investment Partners.
"This latest proposal suggests MSCI is taking a quality over quantity approach. This seems like a good start," he added.
