China’s MSCI inclusion obstacles remain as decision approaches

China’s A-Shares were again not included in the MSCI’s Emerging Markets Index in 2016 and latest reports suggest more work is required for inclusion.
By Paul Walsh
Three main obstacles preventing China A-Shares’ inclusion into the MSCI Emerging Markets Index have yet to be met, according to the major index provider.

An inclusion in the coveted MSCI emerging markets index is seen as a major development in the liberalisation of the Chinese markets..

The decision is expected to be announced in June.

The remaining barriers include the removal of the 20% Qualified Foreign Institutional Investors (QFII) monthly repatriation restriction, implementation of new trading suspension treatment as well as resolution of pre-approval requirements by the local exchanges on launching financial products.

Latest results from the MSCI revealed the repatriation restriction remain, as well as the number of trading suspensions in the China A-shares market remaining “by far the highest in the world” despite some progress being achieved.

It is also revealed that MSCI is in discussions with China exchanges in an effort to reach a resolution on the removal of pre-approval requirements on new and pre-existing financial products.

At the time of the MSCI exclusion, investors and market infrastructure providers had spent three years anticipating the inclusion of China’s A-shares in the MSCI indices. Expectations had been high in 2016 after MSCI announced it was working closely with Chinese regulators.

Since the decision, China has taken a number of steps towards liberalising its markets including the launch of the Shenzhen-Hong Kong Stock Connect scheme.

Launching Shenzhen alongside the existing Shanghai-Hong Kong venture, which launched in November 2014, is aimed at building a more extensive capital market and capitalising on the geographical advantages of Shenzhen.

It is also hoped that the venture will allow investors to experience increased economic benefits from both mainland China and Hong Kong, increase cooperation between the two and consolidate Hong Kong’s position in the financial industry.

Despite an underwhelming launch in its first day of activity last December, the MSCI noted that investors can now access around 1480 Shanghai and Shenzhen stocks through the schemes without the need for a license and quota.