MSCI delays adding Chinese stocks to emerging markets index

Keep a close eye on China’s stockmarkets today, there could be a sharp fall ahead today after global market measurer, MSCI delayed the inclusion of China’s mainland A class shares in its emerging markets index.

In response to the criticism, CSRC official Deng Ge insisted that China’s capital market reform agenda would not be influenced by MSCI’s decision.

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

“Though the quotas for foreign investors have been increasing over the past few years, China’s equity market is very domestic”.

An estimated $1.5tn is benchmarked to its emerging markets index, to which the addition of A-shares would have had the largest impact.

Nevertheless, A-shares jumped by 3pc in value over one day last month on hopes of an endorsement from MSCI, after Goldman Sachs analysts said there was a 70pc chance of winning the index provider’s approval. Shares in most Asian markets rebounded after mounting concern about the United Kingdom voting to leave the European Union (EU) pushed a regional gauge to a three-week low on Tuesday.

Pakistan stocks hit a record closing high on Wednesday, after the country’s stock market was upgraded overnight and included in the MSCI’s emerging market index.

MSCI communicates its conclusions, based on discussions with the global investment community, on a list of markets under review every June.

“The 20% monthly repatriation limit remains a significant hurdle for investors that may be faced with redemptions such as mutual funds and must be satisfactorily addressed”, said MSCI. Measures have been taken to ease quota allocation and capital mobility policies under the qualified foreign institutional investor (QFII) program, tighten trading suspension rules and clarify the beneficial ownership rights of foreign investors under China’s cross-border investment schemes. While highlighting some progress which Chinese authorities have made in recent years the index provider has outlined that the inclusion of Chinese shares into the index hinges on accessibility. Inclusion on MSCI’s index could have attracted more foreign investment as fund managers rebalanced portfolios to reflect the changes.

A wide price gap between the A-shares and H-shares would lead investors to trade between the two types of shares for profit, adding to trading volume. “It created a lot of issues”.

Traders said investors had already been bracing for a “no” decision, as reflected by Monday’s market tumble of more than 3 percent, with some bargain hunting in the process.

QUOTEWORTHY: “It’s definitely possible that we’re seeing state intervention today”, said Angus Nicholson at IG Markets in Sydney.