Managers are divided over whether index provider MSCI could opt to include China A-shares in its Emerging Markets benchmark.
Inclusion – which is subject to a decision announced this week – would begin at 5 per cent of the A-share market, at which level China would represent more than 27 per cent of the emerging markets universe. If approved, inclusion would take effect from June 2017.
A-shares were kept from inclusion at last year’s review due to concerns over issues such as capital mobility restrictions.
And, while Chinese authorities have made efforts to address such concerns, specialists are split on whether inclusion will happen.
James Donald, manager of the Lazard Emerging Markets fund, claimed this would be more likely “in the next two years”, in part because of the issues raised by MSCI.
“They may have dealt with these issues, but it does seem like a very big change for the market to make, and of course it’s a huge market with a very large number of companies so I would have thought that’s quite a hard thing to have done in this period,” he said.
In its consultation on the inclusion of A-shares, which opened earlier this year, MSCI cited the fact that, since last June, it continued to see “positive market-opening measures being announced and implemented” in the region.
These, MSCI said, included the relaxation of capital mobility restrictions. However some warned that further measures are required.
“A lot more needs to be done by China in terms of capital market reforms and, crucially, transparency in policy decisions, lack of which has been a source of volatility in the markets,” said Kunjal Gala, senior investment analyst at Hermes.
“Inclusion in MSCI is not a one-time event but will be a journey determined by true capital market reforms, such as adopting a mechanism enabling stable and efficient markets, enforcing regulations and pushing for governance best practices,” he added.
Chinese markets have been hit by volatility in the last year – notably in August 2015, when the Shanghai Composite index fell 8.5 per cent in a single day.
This, some argue, may have tainted some investors’ views of the region, which could subsequently give the index provider more reason to delay A-share inclusion.
Aidan Yao, senior emerging Asia economist at Axa Investment Managers, said: “With all the turmoil in A-shares over the past 12 months, my immediate response was, given it wasn’t included last year, I cannot see what has changed since that would swing the decision this time around.”
However, some are more positive that the steps taken so far by the Chinese authorities could suffice.
Fidelity’s Hong Kong-based investment director Matthew Sutherland pointed to improved stock halt and resumption rules and plans to launch the Hong Kong-Shenzhen Stock Connect scheme as two measures that could make inclusion more palatable.
The latter follows the Hong Kong-Shanghai Stock Connect and will allow mainland Chinese investors to access Hong Kong-listed stocks.
