MSCI shuts door on China A-shares upgrade

12 June 2014   Category: News, Asia, China, Global, Korea, Taiwan   By Derek Au

Indices provider MSCI has opted against adding China A-shares to its Emerging Markets Index as part of its latest annual review, amid concerns over accessibility to the Mainland’s equity markets, but said it will continue to evaluate possible inclusion over the next year.

The decision not to incorporate A-shares into the MSCI China and MSCI Emerging Markets indices, a move that could have drawn billions of dollars of investment from tracker funds, was based on feedback of a consultation launched in March, which ultimately exposed the investment constraints of the QFII and RQFII quota systems.

Among the concerns highlighted by MSCI regarding the A-shares market were that not all investors were granted a fair level of market access based on their asset size, location, and other criteria. Smaller investors, for example, may not receive a RQFII or QFII quota that is sufficient to match the potential benchmark allocation. It also said that investors outside of Hong Kong, Singapore, London and Paris might have trouble accessing these schemes.

Further issues included limitation on capital mobility and uncertainty regarding the applicable capital gains tax. The consultation also unearthed anxieties over trade execution due to the difficulty in using multiple brokers and the absence of same-day turnaround in the A-shares market.

Remy Briand, managing director and head of index research at MSCI, said: “MSCI’s role is to reflect in its indexes the increasing opportunity set as it occurs. Feedback from investors through this consultation is that they are generally supportive of an inclusion into the index over time but the current quota is still too constraining to warrant an inclusion in the mainstream index right now. We will keep the China A‐shares on the list for potential inclusion into emerging markets and closely monitor the development of various schemes, such as the Shanghai/Hong Kong Stock Connect programme, as they are implemented and used by investors.”

MSCI said it would introduce its China A International Index by June 27 as a standalone index constructed using the MSCI Global Investable Market Index methodology to serve as a standalone benchmark for global investors with QFII and RQFII allocations.

“MSCI’s decision reflects the current regulatory regime that allows only those asset managers with a QFII or RQFII designation to invest in the A-shares market. However, MSCI has also recognised the need to provide investors with additional tools to gain exposure to China’s domestic securities market. The proposed China A International Index is a step in that direction. As China liberalises regulations to expand foreign investment into its securities market, we will see more such indexes and related investment products come into existence,” added Rex Wong, managing director at BNY Mellon’s Asia asset servicing business.

Meanwhile, the index provider will remove the MSCI Korea and MSCI Taiwan indices from its review list for proposed reclassification to join the Developed Markets Index due to a lack of improvement in market accessibility made over the past few years. The two indices could reappear in the review list once meaningful changes are made, MSCI said.