MSCI heeds investor concerns in delaying China A-shares inclusion

MSCI has opted not to add Chinese A-shares to its benchmark emerging market index, delaying their potential inclusion amid continued concerns from international investors about the accessibility of the market.

The index provider said there had been significant improvements in the key areas of concern for investors, regarding the ease of participating in the Chinese A-shares market, but that more work needed to be done.

Remy Briand, managing director and global head of research at MSCI said: “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.”

The index provider, however, held out the prospect of making another classification decision on Chinese A-shares before the next formal review in June next year, leaving room for an “off-cycle announcement”.

A-shares are yuan-denominated shares of a mainland Chinese company typically listed on either the Shenzhen or Shanghai exchanges, as opposed to H-shares listed on the Hong Kong Stock Exchange.

Investing in A-shares is controlled by rules set by Chinese authorities, restricting investors’ ability to gain exposure to the Chinese onshore equity market.

For example, international institutional investors, according to MSCI, still have reservations about the effectiveness of recent policy changes on quota allocations and capital repatriation.

This year’s decision by MSCI on Chinese A-Shares has so far met with a muted reaction compared with last year’s, when, as noted by Mark Tinker, head of AXA IM Framlington Equities Asia, it “was the only story in town”, driving a bubble and a subsequent crash.

“This year the decision on inclusion is far less relevant,” said Tinker, speaking before the MSCI announced its decision. “MSCI may or may not include some weighting for A-shares, but the notion of a wall of ‘dumb money’ coming in to buy at any price was always extremely dubious.”

Anthony Cragg, senior portfolio manager for a Chinese equity fund at Wells Fargo Asset Management, said MSCI’s decision was “naturally, mildly disappointing” and that there was a “reasonable expectation among most commentators that this time around at least some proportion, perhaps 5%, of A-shares would be included”.

Commentators played down the significance of the A-shares’ continued exclusion for several reasons, including the view that their eventual inclusion was inevitable; that there are other channels by which investors can gain access to the Chinese market; and that the delay by MSCI should fuel further financial reform in China – benefitting foreign investors.

“Although this delay may be unsurprising to many,” said John Sin, head of asset servicing, greater China, BNY Mellon, “an initial inclusion weighting of 5%, would have been unlikely to send shockwaves through the international investment community.

“Be it through the various Stock Connect routes, RQFII initiatives or the indices, global investors are still closely following every progressive move with the intention of stepping up investments into China.”