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Revealed: top investors react as MSCI delays A-shares inclusion

Revealed: top investors react as MSCI delays A-shares inclusion

Global index provider MSCI today announced its decision to delay the inclusion of the mainland-traded China A-shares in its key emerging markets index due to concerns of market accessibility.

Despite years of reform in China, investors are still concerned about the openness and transparency of Chinese markets.

However, MSCI said it would retain the China A-shares inclusion proposal as part of the 2017 market classification review and did not rule out a potential off-cycle announcement ahead of June 2017. 

In this article, Citywire Asia collates views from top investors on the impact the decision can have on China and global markets.

Arthur Kwong, BNP Paribas Investment Partners

Head of APAC equities

We respect MSCI’s decision to postpone China’s A-share inclusion to the MSCI Emerging Markets Index, reflecting their leadership as index provider -- their prudence to assess and implement.

The announcement indicated that there is room for Chinese authorities to further enhance investment accessibility and information transparency to all global investors before the A-shares internationalisation.

We would prefer if MSCI has a detailed, well-timed consultation for a rational judgment that will be impactful for the investment world in the long term.

We believe external / foreign ownerships of China’s onshore bonds and equities market are under-represented at the moment.

According to MSCI A-shares roadmap, China A-shares will ultimately account for 18.2% of the index at full inclusion from the initial 5% partial inclusion, which is equivalent to about 1% of China A-shares weighting in the MSCI Emerging Markets Index.  
 
We expect the Chinese authorities to continue enhancing accessibility and quota mechanism, and eventually liberalizing capital mobility. Overall, we appreciate MSCI’s decision.  But considering the pace of regulatory changes, we maintain our view that MSCI’s China A-share inclusion will take place in the next 12 months.  

Ashish Goyal, NN Investment Partners (Singapore)

Head of emerging markets equity

We are not surprised by the decision. While China has made moves to bring their regulations and market practices closer to those prevalent in global markets, there is still some way to go.

In particular, capital mobility, limits on repatriation, approvals for products which use Chinese indices etc. are challenges for investors.

The recent changes to market suspension rules have to be seen working in practice given that a large portion of the market was suspended in the last market turmoil. Chinese government intervention to support markets has not inspired confidence either.
 
The non-inclusion should not have any major impact on markets.

Most institutional investors either access China through the H-share market or through the access products that are available for A shares. Emerging markets in Latin America and EMEA will benefit from the non-inclusion.

The focus will now shift to the next review in 2017 or even the possibility of a mid-cycle review later this year. 

Mark Valadao, State Street Global Advisors

Head of portfolio strategists, Asia ex Japan

Despite MSCI’s decision today, from a short-term perspective, China A shares should still be on the table as an opportunity set as global investors prepare for its inevitable inclusion into MSCI Emerging Markets.

It is not a matter of if but when and the announcement of a definitive inclusion timeframe could be soon as the remaining issues become resolved.

From a long term perspective, when China A shares ultimately reaches full inclusion, China’s index weighting will be to emerging markets what the US is to developed markets.

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