Markets

Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

Nisha Gopalan is a Bloomberg Gadfly columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

How might a bureaucrat at the China Securities Regulatory Commission respond to MSCI's decision to deny China's A shares entry into its benchmark indexes? The following complaint note was never written. 

Dear Comrades at MSCI:

Woe betide you for once again missing the opportunity to include the A shares of the People's Republic of China in your emerging markets index. You didn't see the light last year, and you fail to see it now. The dialectical struggle that has sprung from your dithering has extracted a terrible price.

You, comrades, are guilty of turning a straightforward decision into a speculative game, with global investment banks distastefully assigning their subjective probabilities to what should always have been a "historical certainty," as one of our departmental heads recently described the eventual outcome.  

Including 5 percent of A shares in the MSCI Emerging Markets Index would have been a decent start. Once you had managed to add all mainland shares, China's weighting could have risen from the current 25.9 percent -- which is made up largely of Hong Kong and U.S.-traded Chinese companies -- to 39.9 percent.

It is inevitable that Chinese stocks will one day replace those from countries in our natural sphere of influence in Asia, as the One-Belt-One-Road initiative places us at the center of a new economic order. China deserves to be 100 percent of all your benchmarks, including the MSCI Bangladesh Index.      

Instead, you chose to heed gratuitious advice from the likes of Bloomberg Gadfly. Your Grave Historical Error mustn't go unremarked.

Be reminded of what you said in June last year. You spoke of "substantial progress" in opening the Chinese market to institutional investors, the said investors' eagerness for "further liberalization," and of "fruitful collaboration" with the CSRC. You also promised inclusion as soon as some of the issues outlined by you were resolved, even if that meant making a change outside of your annual review.

And then you did nada.   

Your hesitation became a vote of no-confidence. The CSI 300 Index, which had closed at a seven-year high the day before your non-decision, has dropped 43 percent since then. China is the worst-performing market in the world, and you're to blame. Had you given your blessing to the $1.5 trillion of funds that track your indexes to embrace A shares, you would have performed your historical role of providing an equity cushion to absorb losses from a tiny dram of excess debt. After all that China has done to make the world richer, you ran away when we needed risk-sharing. 

Your complaints about voluntary trading suspensions reflect a failure to appreciate the subtleties of Chinese capitalism. This was a necessary precaution to prevent foreigners from making the mistake of selling. We remain vigilant against such anti-China activities. About 5 percent of our market capitalization is in limbo; shares worth more than $50 billion haven't changed hands even once this year. While people poked fun at our botched four-day experiment with market-wide circuit breakers, they ignored our most durable speculation buster: never-ending trading halts.

Frozen
China's market is the most sclerotic among top members of the MSCI Emerging Markets Index
Source: Bloomberg

We concede things may have gone a bit too far. The Shenzhen and Shanghai stock exchanges released memos in May aimed at ending arbitrary stock suspensions. Now, companies need strong reasons to get their shares halted. Suspensions can last at most three months -- and that's only for companies undergoing major restructuring.

Some of the other concerns you raised have also been addressed. Foreign investors with up to $5 billion of assets under management can get a quota without seeking approval each time they buy stocks. They can also sell shares after three months, rather than holding them for at least a year. Qualified foreign institutional investors, as you noted in this year's rejection letter, are still limited to repatriating a maximum 20 percent of the net asset value of their fund.  

But those restrictions are mere formalities. Why anybody would want to sell a Chinese share is beyond comprehension when virtually none of the stocks tracked by China's analyst community has a sell rating. Besides, we've been right in demanding that exchange-traded funds, or ETFs, based on A shares first win Chinese stock exchange approvals. Your contention that the measure is "anti-competitive" ignores the reality that our A shares aren't for the faint of heart. Rather than grant small investors in Alabama unfettered access to the CSI 300, we would redirect them to $0.22 snakes-and-ladders boards on Alibaba.com. Fewer health risks.

Great Expectations, Quashed
China's stock market has lost two-fifths of its value since MSCI's decision last June
Source: Bloomberg

Finally, people haven't failed to notice that Pakistan is reentering your emerging market gauge while we're being held back pending "further improvements" in accessibility of A shares. Not only did you learn nothing from your Great Leap Backward of 2015, but you also have no idea of how to give face.

So woe betide you, comrades, for your refusal to land on the right side of history. You need re-education in how to assess a stock market with Chinese characteristics. Drop us a line if you would like to arrange a summer camp.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the authors of this story:
Andy Mukherjee in Singapore at amukherjee@bloomberg.net
Nisha Gopalan in Hong Kong at ngopalan3@bloomberg.net

To contact the editor responsible for this story:
Matthew Brooker at mbrooker1@bloomberg.net