China is starting to convince international money managers that its $7.8 trillion stock market is ready for MSCI Inc.’s global indexes.
Templeton Emerging Markets Group’s Mark Mobius, who was against inclusion as recently as March, became the latest convert on Tuesday, saying his funds are now buying yuan-denominated shares. Five of nine global investors interviewed by Bloomberg over the past month say Chinese stocks should be added to the indexes after getting rejected last June.
While detractors want China to further relax investment curbs and provide more tangible proof of share ownership, funds in favor of inclusion point to the ease of access through the Hong Kong exchange link and clarified tax laws. For Chinese authorities, who met with money managers in the U.S. two months ago to make the case for MSCI inclusion, gaining acceptance is part of a broader effort to professionalize the stock market and boost the yuan’s role in global finance.
“Every time MSCI came around, I said ‘Forget it. We can’t invest,’” Mobius, who oversees about $40 billion in emerging markets, said in an interview in London on Tuesday. “Now we can, and I have no objection.”
The New York-based index provider, whose gauges are used to benchmark an estimated $9.5 trillion of assets, will say on June 9 whether China is eligible for inclusion. It rejected the country 11 months ago after a yearlong consultation with investors. FTSE Group will review the so-called A shares in September for possible inclusion in its Global Equity Index Series as a secondary emerging market, the London-based index provider said in March.
MSCI can’t comment on the issue before its announcement next month, Chia Chin-ping, a Hong Kong-based managing director, said in a phone interview Tuesday. Chia estimated in March 2014 that including mainland shares may lure $12 billion of inflows.
China’s benchmark Shanghai Composite Index has surged 114 percent since MSCI’s decision last year, spurred by an influx of individual investors and optimism that monetary stimulus will revive economic growth from the weakest pace since 1990. The gauge slipped 0.6 percent on Wednesday. A Bloomberg index of the most-traded Chinese stocks in the U.S. advanced 0.4 percent by 11:07 a.m. in New York.
Companies with primary listings on mainland exchanges now comprise a record 10.9 percent of the world’s $71.6 trillion market capitalization, according to data compiled by Bloomberg. MSCI indexes currently only include Chinese shares listed in Hong Kong, along with some foreign-currency B shares.
The Shanghai-Hong Kong exchange link, which started in November, has allowed anyone with a Hong Kong brokerage account to gain access to the mainland stock market. Authorities are planning a similar program between Hong Kong and Shenzhen later this year.
For some investors, the exchange link isn’t enough to warrant inclusion in MSCI indexes because the program is still subject to quotas. Foreigners can buy a net 13 billion yuan ($2.1 billion) of mainland shares each day and an aggregate quota of 300 billion yuan.
“A shares won’t be included in the MSCI index unless China can expand the quota,” said David Kao, who manages the Prudential Financial Asia-Pacific Fund in Taipei.
Use of the link has been tepid so far -- with just 45 percent of the quota used up -- in part because of additional concerns over China’s rules on settlement and the legal status of shares purchased through the connect.
China has addressed some of the biggest issues that emerged from MSCI’s consultation with investors last year. One is taxes, with authorities saying in November that purchases through the exchange link will get a “temporary” waiver on capital gains levies. Policy makers have also eased controls on using multiple brokers and started a trial to allow same-day trading on some securities.
Other market-structure changes include the start of equity-linked options trading for the first time in February and the addition of two new stock-index futures in April. The securities may appeal to professional investors seeking ways to hedge risk in a cash equities market where individuals account for about 80 percent of trading.
Capital-account convertibility will increase this year, People’s Bank of China Governor Zhou Xiaochuan said on March 22. The nation is pushing for its currency to be included in the International Monetary Fund’s Special Drawing Rights, a distinction that many see as signaling reserve-currency status.
The fund managers interviewed by Bloomberg on the MSCI decision oversee almost $400 billion in combined assets. Supporters of adding mainland shares include FIM Asset Management Ltd., JPMorgan Asset Management, Hermes Fund Managers Ltd. and Edmond de Rothschild Group, while Schroder Investment Management Ltd., NN Investment Partners and Pioneer Investments are against it.