MSCI, a global index provider, will not be adding mainland-traded Chinese shares to its emerging market index, citing concerns about market accessibility in China. The decision is a setback to Chinese efforts to both encourage the internationalization of the renminbi and join international capital markets.
MSCI’s decision doesn’t rule out a future inclusion for Chinese A shares, but that may have to wait until its 2017 review cycle.
MSCI’s decision is at odds with the International Monetary Fund’s landmark decision last November to add the renminbi to its elite Special Drawing Rights (SDR) currency basket, where the Chinese currency joined other global stalwarts such as the U.S. dollar, Euro, Japanese Yen, and the British pound sterling. (I discussed that in The Diplomat at the time.) Notably, the IMF’s decision involved a determination that China’s currency was both “widely used” and “freely usable.” Though the international group had largely accepted the former as a foregone conclusion amid China’s expansive global economic footprint, there had been major hesitations about the second issue of the renminbi’s usability.
Nevertheless, the IMF moved ahead and added the renminbi to its SDR, even as Chinese equity markets encountered massive volatility beginning last summer, drawing the People’s Bank of China into the game of intervention to prop up confidence in the renminbi. Specifically, the PBOC burned through $470 billion in foreign reserves to support the renminbi.
Moreover, in August 2015, the bank cautiously announced what it described as a “one-off depreciation” of the renminbi, but intervention continued intermittently amid market volatility and concerns over widespread capital flight.
MSCI’s decision to delay the inclusion of Chinese stocks into its emerging markets index will add additional pressure on China to undertake reform in both market access and broader structural issues. Remy Briand, the global head of research at MSCI, told the Wall Street Journal that “International institutional investors clearly indicated that they would like to see further improvements in the accessibility of the China A shares market before its inclusion in the MSCI Emerging Markets Index.”
Mostly, it appears that MSCI is being cautious and observing how recent regulatory changes to Chinese equity markets play out in practice before adding Chinese stocks to its emerging markets index. There do appear to be serious outstanding issues with Chinese regulatory provisions that continue to spook investors, such as restrictions on monthly investment withdrawals. (Liquidation and short-selling have become particularly sensitive regulatory issues in China after last year’s roller-coaster summer in equity markets.)
China’s reaction to what it sees as a disappointing decision by MSCI has been unsurprising. Using language similar to its descriptions of the SDR before the renminbi’s inclusion, the China Securities Regulatory Commission (CSRC) noted that any index that didn’t include Chinese shares was “incomplete.”
A few days before Tuesday’s announcement, Qi Bin, the head of CSRC, had noted that the inclusion of renminbi-denominated Chinese equities in MSCI was a “historical certainty” and was bound to happen at some point.
Unfortunately for Qi, that time hasn’t come quite yet.