MSCI Inc. held off from adding China's mainland stocks to its benchmark indexes, opting to work with the nation's securities regulator to try to overcome remaining obstacles to inclusion. Chinese shares dropped.
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 the China Securities Regulatory Commission, according to a statement issued Tuesday. MSCI said a decision on inclusion may come at any time. The Shanghai Composite Index retreated as much as 2.2 percent, before paring declines to 0.8 percent at 9:50 a.m. local time.
The possible addition of mainland equities to MSCI's global indexes has been a divisive issue among fund managers. Even as China's 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.
While detractors want China to further relax investment curbs and provide more tangible proof of share ownership, funds in favor of inclusion point to the ease of access through the Hong Kong exchange link and clarified tax laws. For Chinese authorities, who met with money managers in the U.S. this year to make the case for MSCI inclusion, gaining acceptance is part of a broader effort to professionalize the stock market and boost the yuan's role in global finance.
Investing Curbs
Foreigners 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. Overseas investors can buy a net 13 billion yuan ($2.1 billion) of mainland shares each day and there's 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.
Tax Waiver
"Short term, it's 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. It's telling asset managers, 'You have to figure this out — this change is coming.' I don't believe the three issues they raised are insurmountable. They won't wait until the 2016 review to include A shares. It will happen sooner."
China has addressed some of the biggest concerns that emerged from MSCI's 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.
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.
Saudi Stocks
China, through companies listed in Hong Kong, accounts for more than 25 percent of the emerging-market benchmark. It's the biggest weighting in the gauge, followed by South Korea's 15 percent and 13 percent for Taiwan, data compiled by Bloomberg show.
MSCI also said Tuesday it's monitoring the opening of Saudi Arabia's 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.
