China Forges Ahead With Reform Despite Trade War, MSCI Says

(Bloomberg) -- China’s stock-market slump and the fallout from a trade dispute with the U.S. are doing nothing to divert the country from plans to open up to foreign investors, according to MSCI Inc.

The index provider’s concerns that China may roll back market access to global investors, turning interventionist like it did during the 2015 slump, have been allayed, Chia Chin Ping, MSCI’s managing director for research, said in an interview, before the index provided released its semi-annual review.

“When the trade war started, we were concerned how the whole market liberalization will be affected,” Chia said in London. “But instead of locking up the market, they are actually moving forward and seeking greater participation from investors from anywhere in the world.”

China Forges Ahead With Reform Despite Trade War, MSCI Says

China’s equity benchmark has lagged emerging-market peers in dollar terms for 11 of the 13 quarters since the middle of 2015, when the government intervened to stop a $6.3 trillion rout.

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But the inclusion of mainland shares in MSCI emerging-market indexes in June 2018 has revived interest in China. It also boosted the Shanghai-Hong Kong Stock Connect system, designed to allow international traders to invest in mainland shares without having to establish a local presence. And while the Shanghai market is among the worst performers in the world this year -- owing to the concern around the trade war -- equity inflows have resumed in the past three months.

The number of trading accounts under Stock Connect, which had languished at 1,700 before June 2017, jumped to 6,300 after the MSCI move by September this year, Chia said. That helped double the amount of money put through the program to buy the so-called A shares to 600 billion renminbi ($86 billion) over the 15 months, he said.

Among the recent steps taken by China to liberalize the equity market are:

  • An overhaul of the trading suspension regime which became a major concern for investors two years ago; government’s efforts will reduce the number of suspensions and bring back companies that stopped trading on the exchange back on the floor more quickly
  • Divestiture of the market stabilization fund and redirecting government funds to more passive investments, thereby adopting a hands-off approach

“That’s a departure from the past,” Chia said. “They no longer want to control the market behavior but enforce good practices.”

MSCI is engaging the Chinese government on further measures to remove the peculiarities of the Shanghai market:

  • China has a tight settlement cycle, while most of the world follows the trading-day-plus-two model. The discrepancy adds to time and costs of transactions for foreigners
  • Opening the equity derivatives market
  • Further narrowing or eliminating the scope of trading suspensions

“China has a remarkable track record in opening up its market,” Chia said. “They know they can’t afford to stop now.”

©2018 Bloomberg L.P.