MSCI denies China entry into indexes for 3rd time

It says China needs to do more to make its markets accessible to foreign investors

HONG KONG • China's domestic equities were denied entry into MSCI Inc's benchmark indexes for a third time, a setback for President Xi Jinping's efforts to raise the profile of mainland markets and turn the yuan into an international currency.

MSCI said on Tuesday that China still had to do more to make its markets accessible to foreign investors, and that it could not say when MSCI was likely to give the green light.

That is a blow for Chinese policymakers who have rushed to address MSCI's concerns over the past six months in the hope that inclusion in the Emerging Markets Index, tracked by US$1.5 trillion (S$2.03 trillion) in global assets, could draw up to US$400 billion into China's stocks over the next decade.

China brushed off the decision yesterday, while the country's markets were up by the close despite the rejection.

"Any international indexes without China's 'A' shares are incomplete," Mr Deng Ge, spokesman of industry watchdog the China Securities Regulatory Commission, said in a statement.

The benchmark Shanghai Composite Index closed up 1.58 per cent to 2,887.21 while the Shenzhen Composite Index jumped 3.12 per cent to 1,889.87, after both dropped in early morning trading.

Market-watchers and analysts said the surprise decision highlighted reservations among global institutional investors about yuan-denominated assets and Beijing's commitment and ability to implement capital markets reform.

China's markets have had a turbulent 12 months, with a 40 per cent crash in stocks, followed by heavy state intervention and an unprecedented exodus of capital that has put pressure on the Chinese currency.

"The decision highlights a much bigger issue, which is the resistance among global investors to allocate into yuan assets, despite the fact China is home to the world's second-largest equity market and third-largest bond market," said Mr Peter Alexander, CEO of investment consultancy Z-Ben Advisors.

He added that the decision put global investors "on the wrong side of history".

MSCI this year raised new objections to a rule that requires foreign investors to seek approval from the country's stock exchanges before launching products based on A shares, which MSCI says could reduce investors' ability to hedge exposure.

Under an industry consultation relaunched in April, MSCI had proposed adding 5 per cent of the free float value of 421 A shares, which would have accounted for 1.1 per cent of its benchmark index. If the decision had gone China's way, the change would have taken effect in June next year.

Many analysts had put the chances of inclusion at 50 per cent or higher, with Goldman Sachs raising the odds to 70 per cent last month. In a note published yesterday, HSBC said it had "underestimated the resistance from the global investment community".

MSCI said it will reconsider inclusion in its 2017 market classification review, while not ruling out an earlier announcement.


A version of this article appeared in the print edition of The Straits Times on June 16, 2016, with the headline 'MSCI denies China entry into indexes for 3rd time'. Print Edition | Subscribe