(Bloomberg) — MSCI Inc. held off from adding Chinas mainland stocks to its benchmark indexes, opting to work with the nations securities regulator to overcome remaining obstacles to inclusion.
The index provider expects to put yuan-denominated equities, also called A shares, in its global benchmarks after settling investor concerns about accessibility and share ownership through collaboration with theChinaSecurities Regulatory Commission, according to a statement issued Tuesday. MSCI said a decision on inclusion may come at any time.
Chinese authorities have been pushing for an MSCI endorsement as they seek to elevate the status of mainland markets on the world stage and make the yuan a more international currency. Efforts to open up local shares to foreign investors, including an exchange link with Hong Kong, have already helped propel a $6.5 trillion surge in the value of Chinese equities over the past year.
Some might regard it as disappointing that it didnt happen immediately, Shane Oliver, the head of investment strategy at AMP Capital Investors Ltd. in Sydney, which manages about $124 billion, said by phone. By the same token, it looks like its going to happen anyway at some point. Its just a question of when. Theyve just got some remaining issues to resolve.
The Shanghai Composite Index dropped as much as 2.2 percent before paring declines to 0.2 percent at the close.
The possible addition of mainland equities to MSCIs global indexes has been a divisive issue among fund managers. Even as Chinas stocks more than doubled over the past year, foreigners have been cautious about entering a market where retail investors account for 80 percent of trading.
Investing Curbs
Global investors are still subject to quotas under the Shanghai-Hong Kong exchange link, which started in November and allowed anyone with a Hong Kong brokerage account to gain access to the mainland stock market. Foreigners can buy a net 13 billion yuan ($2.1 billion) of mainland shares each day and theres an aggregate quota of 300 billion yuan.
MSCI said in its statement that it will work with Chinese regulators to establish policies that resolve the remaining accessibility issues. Those include giving investors access to quotas commensurate with the size of their assets under management, improvements in liquidity and further clarification of share-ownership rules.
Closer collaboration with the regulator will speed up the process, Remy Briand, MSCIs global head of research, said on a conference call. There will be at least 12 months between any announcement of A shares index inclusion and the implementation, Briand said.
Tax Waiver
Short term, its a disappointment for some of us who would like to see them start the process sooner, said Brendan Ahern, the chief investment officer at Krane Fund Advisors, which manages a U.S. exchange-traded fund investing in Chinese domestically listed shares. But the trajectory is there. Its telling asset managers, You have to figure this out — this change is coming. I dont believe the three issues they raised are insurmountable. They wont wait until the 2016 review to include A shares. It will happen sooner.
Chinahas addressed some of the biggest concerns that emerged from MSCIs review last year over market access. One is taxes, with authorities saying in November that purchases through the exchange link will get a temporary waiver on capital gains levies. Policy makers have also eased controls on using multiple brokers and started a trial to allow same-day trading on some securities.
Stock Valuations
The Shanghai Composite Index has jumped 152 percent in the past 12 months through Tuesday, the most among major global benchmark indexes, spurred by record margin debt and surging participation by individual investors. The gauge is valued at 25.6 times reported earnings, compared with a multiple of 13.9 for the MSCI Emerging Markets Index.
China, through companies listed in Hong Kong, accounts for more than 25 percent of the emerging-market benchmark. Its the biggest weighting in the gauge, followed by South Koreas 15 percent and 13 percent for Taiwan, data compiled by Bloomberg show.
MSCI also said Tuesday its monitoring the opening of Saudi Arabias equity market, consulting investors regarding a possible inclusion of the MSCI Saudi Arabia Index in the emerging-market benchmark. The index-provider also said it added Pakistan to the list for consideration for an upgrade to developing-nation status as part of the 2016 review.
