MSCI Says China's Trading Halts May Keep It Out of Stock Indexes

  • Index compiler will decide on A-share inclusion in June
  • Chinese equities are leading global declines this year

MSCI Says China Must Limit Market Intervention

MSCI Inc. signaled China’s attempts to stem its stock rout have dealt a blow to the nation’s efforts to get shares included in global indexes.

The index compiler wants authorities to commit to preventing a repeat of the trading halts seen in last year’s selloff, MSCI said in a statement, starting a fresh round of discussions before a June decision on whether to put mainland stocks in its benchmark gauge. After MSCI held off on taking that step last year, a plunge wiped $5 trillion from the world’s second-biggest equity market and spurred unprecedented government intervention. As stocks tumbled in July, half the companies listed in China were allowed to suspend their shares.

“MSCI would be greatly risking their credibility by allowing China into its Asia indices when there is still so much state intervention and control over China’s bourses," said Angus Nicholson, Melbourne-based analyst at IG Ltd., who doesn’t expect inclusion in June. “And China is still recovering from last year’s selloff and is slowly trying to bring the equity markets back to health, which is likely to be a delicate and prolonged process, one that they would not risk by rushing changes."

The Shanghai Composite Index is down 15 percent in 2016, the biggest drop among benchmarks for major markets around the world. Amid last year’s selloff, the government also effectively shut down the mainland futures market, banned large shareholders from selling stakes and cracked down on short-selling. MSCI said a decision to include 5 percent of A shares in its index will depend on regulators implementing changes so that widespread trading halts can’t happen again.

“I don’t think the regulators will roll out measures immediately to meet the requirements from MSCI,” said Wei Wei, an analyst at Huaxi Securities Co. in Shanghai. “They will do things on their own schedule. There will still be government meddling but the magnitude will be moderate. The chance of being included in MSCI’s global indexes in June isn’t that high.”

The China Securities Regulatory Commission didn’t immediately respond to a faxed request for comment.

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. Investors won easier access to Shanghai shares through the exchange link with Hong Kong that started in November 2014, while China relaxed restrictions on foreign funds in February, saying managers approved under its Qualified Foreign Institutional Investor program will no longer need to apply for quotas.

Too Big

“China and its markets are too big to ignore so its still possible for the indices to be included in June,” said Tommy Xie, Singapore-based economist at Oversea-Chinese Banking Corp. “While concerns remain about stock volatility and renminbi volatility, authorities are still showing gestures of trying to open up. There’s damage to be repaired but the possible start of the Shenzhen-Hong Kong stock link for example shows that they are seeking to instill confidence among foreign investors.”

MSCI will weigh feedback from investors on efforts to make mainland markets more accessible, and require that Chinese stock exchanges give up the right to pre-approve any global investment products that track indexes containing A shares, the compiler said.

That provision “is unique among emerging markets and has emerged as a critical concern," MSCI said, noting it applies to exchange-traded funds regardless of where they are listed. “This issue may become a roadblock to the inclusion of China A shares in the MSCI Emerging Market Index if not addressed by the local Chinese stock exchanges."

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