MSCI delays China A-share inclusion

MSCI has delayed the inclusion of China A-shares in its benchmarks, amind concerns about the openess and liquidity of the markets.

The index provider has been working to include the A-shares in its indices but says it has to resolve “a few important remaining issues” before it feels able to do so. 

The group will now work with the China Securities Regulatory Commission to work on the issues and says it expects an annoucement “as soon as the issues it has outlined are resolved”.

MSCI’s concerns focus on three main issues: the quota allocation process, capital mobility restrictions and beneficial ownership of investments.

The quota allocation process is not yet sufficient, particularly for larger or passive investors, MSCI says, with asset managers expecting quota equivalent to their size and the ability to get more quota.

The index house also has concerns around liquidity, with investors calling for daily liquidity. They also have raised the issue of the lock-up of capital and the restrictions on repatriation of money outside of the country.

Lastly, MSCI says there are still some grey areas around ownership when using the Stock Connect scheme, although acknowledges that recent clarification from CSRC has been helpful.

Matthew Sutherland, investment director at Fidelity Worldwide Investment, says the move by the MSCI is not surprising.  

“Whilst there could be some short-term disappointment on the part of domestic retail investors around this decision, it is not a surprising decision and we don’t feel it will be a major market-moving event.”

However, MSCI commended the opening of the Chinese markets, through the establishment of the Shanghai‐Hong Kong Stock Connect program and its upcoming expansion, as well as the expansion of the RQFII program.

When MSCI does include China A-shares it is expected to do so initially at 5 per cent of the actual weighting, which research from Morgan Stanley shows will amount to passive inflows of $2bn. This will rise to $33bn when 100 per cent of the free float weights are accounted for.