China buoys MSCI inclusion odds with HongKong-Shenzhen link

China has approved a program that allowing investors in Hong Kong to trade equities on the Shenzhen exchange.
China has approved a program that allowing investors in Hong Kong to trade equities on the Shenzhen exchange.PHOTO: AFP

BEIJING (BLOOMBERG) - China has boosted the chance of getting its domestic stocks included in MSCI's main benchmarks after approving a program that will allow investors in Hong Kong to trade equities on the Shenzhen exchange.

By further opening its US$6.5 trillion (S$8.7 trillion) domestic share market to foreign traders, China is addressing limitations to mainland trading flagged by MSCI when it rejected the stocks for a third year in June. Global investors praised the regulator's decision on Tuesday.

"Removing barriers to foreign investment makes sense as it should hasten inclusion of China's market in MSCI global indexes," Steven Einhorn, vice chairman at New York-based Omega Advisors said in an e-mail. "It internationalises China's market," he said.

The long-delayed link, which had been expected for more than a year following a similar program between Shanghai and Hong Kong in 2014, may start in four months. The China Securities Regulatory Commission also lifted restrictions on asset flows, saying it won't impose an aggregate quota for the Shenzhen link, and that it will remove the existing cap on the Shanghai program. There will be still daily limits on net purchases for both programs.

The announcement comes amid renewed stability in the market, which saw US$5 trillion in equity values evaporate during a rout in 2015. While a botched government rescue campaign spooked global investors at the start of the year, policy makers have taken steps in recent months to ease curbs on international investors, including opening up the interbank bond market to encourage capital inflows and ease pressure on the yuan. Overseas fund managers can also trade in China through the quota-regulated qualified foreign investor programs.

MSCI spokesman Kristin Meza didn't respond to an e-mail and multiple phone calls seeking comment on the impact of the Shenzhen link on the firm's index decision-making process. New York-based MSCI is slated to review the Chinese market's eligibility next year, though it hasn't ruled out an earlier inclusion.

Tuesday's decision "speaks to the fact that Chinese regulators are focusing on opening the capital market in general, whether it's equity or debt markets," John Malloy, who oversees US$2 billion as co-head of emerging and frontier markets at RWC Partners in Miami, said by phone. "That's the bigger story."

In denying China's inclusion in June, MSCI - whose emerging-market index is tracked by investors with about US$1.5 trillion in assets - cited a need for improvements in market access. MSCI has said it will monitor policies on quota allocations, capital mobility and trading suspensions. Other hurdles include a 20 per cent monthly repatriation limit and pre- approval restrictions on introducing financial products.

Opening the Shenzhen market is "in line with some of the recommendations from MSCI for formal inclusion in terms of making their domestic market more available for international investors," Charlie Wilson at Thornburg Investment Management Inc, said by phone.

There are more than 1,800 companies listed in Shenzhen, with a combined market capitalization of US$3.2 trillion, compared with US$3.4 trillion in Shanghai.