China to Restrict Trading Halts in Boost to MSCI Inclusion Odds

  • Halts to be capped at three months for big asset restructuring
  • New rules will improve liquidity, Northeast Securities says

China’s stock exchanges published rules restricting trading halts in a move that raises the odds of the country’s yuan-denominated stocks being included in MSCI Inc.’s global benchmark indexes.

The rules are aimed at curbing arbitrary suspensions in Chinese stocks, known as A shares, the Shanghai and Shenzhen stock exchanges said in separate statements on Friday. Halts will be capped at three months for major asset restructuring and one month during private placements. The bourses will have the right to reject trading-halt applications under extreme market circumstances in order to protect investors, the statements said.

China’s exchanges allowed trading suspensions that shut down half the stock market as officials struggled to stop a $5 trillion selloff last summer. MSCI said in March a decision to include A shares in its indexes will depend in part on regulators implementing changes so that widespread suspensions can’t happen again. Approval could come as early as next month, which may lure billions of dollars in inflows and bolster a stock market that’s been the world’s worst performer this year.

"This will definitely be a good development and will enhance the possibility of A shares being included in MSCI indexes," said Shen Zhengyang, a Shanghai-based analyst with Northeast Securities Co. "It shows that the regulator is willing to integrate the domestic stock market with international equity markets. Stock suspensions used to be a mess, and funds couldn’t trade some stocks even if they were willing to buy. Now, with the regulations, stock trading liquidity will be improved."

Investor Concern

A Bloomberg poll of strategists and fund managers found that 16 of the 23 surveyed named stock suspensions as a main obstacle to China’s inclusion in MSCI’s indexes. Capital controls, government intervention, stock beneficiary ownership and cross-border investment quotas were other common concerns ahead of the June decision, the survey showed.

“The issue of suspensions has been high on the agenda and the Chinese government is trying to address foreign investors’ concerns,” said Hao Hong, chief China strategist at Bocom International Holdings Co. in Hong Kong. “They are changing the rules in order to get in. It raises the odds of getting in.”

In the Friday statements, the exchanges said a shareholders’ meeting must be convened for longer suspensions. The new rules will take effect immediately.

Fund Flows

With an estimated $16 billion of investment flows at stake, Chinese regulators are pushing for the nation’s $5.6 trillion stock market to be included in the MSCI’s global benchmarks. In February, the nation’s foreign-exchange regulator issued rules making it easier for overseas investors to shift money out of the country and apply for investment quotas.

The index compiler said in March a decision to include 5 percent of yuan-denominated shares in its index will depend on regulators implementing changes so that widespread halts can’t happen again. About 311 companies in the Shanghai and Shenzhen exchanges are still suspended or halted, representing about 10 percent of the market, according to data compiled by Bloomberg.

“Even if China is included, it is a very modest weighting initially,” said Khiem Do, the Hong Kong-based head of multi-asset strategy at Baring Asset Management. “At the end of the day, whether investors are going to use that opportunity to buy or not depends on what kind of growth the market could deliver. Noone is going to be interested if they can’t deliver good earnings growth.”

— With assistance by Amanda Wang, and Kyoungwha Kim

Before it's here, it's on the Bloomberg Terminal.