MSCI Endorses China Fund Easing Amid A-Share Inclusion Bid

  • Removal of need for quota application seen as `significant'
  • MSCI Sees final decision on China A-shares inclusion in June

MSCI Inc. said it welcomes China’s relaxing of restrictions on foreign funds amid the country’s bid to gain entry for its mainland markets into global stock benchmarks.

The index provider’s statement followed a decision earlier in the week by the State Administration of Foreign Exchange to no longer require applications for investment quotas from fund managers approved under its Qualified Foreign Institutional Investor program. Maximum allocations will instead be linked to assets under management and subject to a ceiling of $5 billion. Open-ended funds will also be able to shift money in and out of the nation’s stocks daily, policy makers said.

“MSCI sees the decisions to link the quota allocation process to the size of assets by international investors and to remove the need for a quota application as significant steps,” the company said in a statement on Friday in New York. Starting early April, MSCI will “again actively seek feedback from the international investment community” to make a final decision in June 2016, according to the statement.

Major Hurdles

Chinese authorities have been pushing for an MSCI endorsement as they seek to elevate the status of mainland markets on the world stage and make the yuan a more international currency. MSCI held off from adding China’s A shares to its benchmark indexes last year, opting to work with the nation’s securities regulator to overcome remaining obstacles such as investor quotas and ease of access.

With these changes, “all major impediments to MSCI A-share inclusion have now been removed,” analysts at Shanghai-based research firm Z-Ben Advisors, wrote in a note Friday before the MSCI statement.

Attracting foreign capital has taken on greater urgency in recent months amid record outflows, a weakening of the yuan and as local shares tumbled, though analysts cautioned that SAFE’s rule change is unlikely to attract major inflows any time soon and doesn’t guarantee MSCI inclusion.

While the easing addresses some of the issues highlighted by MSCI, remaining curbs include limits on the repatriation of assets. SAFE also said it retains the authority to adjust rules for outflows based on market conditions.

The previous cap on institutional investments was $1 billion, although officials had already allowed that limit to be breachedwhen they gave Fidelity Investments Management (Hong Kong) Ltd. a $1.2 billion quota in 2015. QFII funds can now be pulled from China after three months, down from a year previously, provided the net withdrawal in a month doesn’t exceed 20 percent of assets held at the end of the previous year, according to SAFE.

“We see this opening up of the capital markets to provide greater level of access, so this is the natural next step,” Brendan Ahern, a managing director at Krane Fund Advisors LLC, said by phone from New York on Friday after the MSCI statement.

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