MSCI Sees `Lot of Issues' to Solve on China Stock Inclusion

(Bloomberg) -- China still has some ways to go to win approval for its mainland stocks to be included in emerging-market indexes, according to the head of the company that compiles the benchmarks.

"There’s still a lot of issues to resolve in a short period of time,” MSCI Chief Executive Officer Henry Fernandez said in an interview on Bloomberg TV. “We’re making a lot of progress on all fronts but it doesn’t mean we’ll get there."

MSCI is about half-way through consulting its clients, with about 100 left to go ahead of the June 20 announcement on the decision, according to Fernandez. This is the fourth attempt at including so-called A-shares. Last time around there were three key issues, the CEO said:

  • Access to the market through QFII or RQFII. A Qualified Foreign Institutional Investor (QFII) is one that’s been approved by China to buy onshore securities, while an RQFII is an authorized investor using offshore yuan (renminbi) to do the same.
  • Problems with the suspension of trading in some stocks.
  • Challenges with Chinese regulators insisting on a pre-approval process for financial products abroad that are linked to indexes including A-shares.

On the first criterion, Fernandez said: "We’re giving up a bit on the QFII and RQFII because the reform program is not there." He said MSCI is "focused on the stock connect," by which foreign investors can buy Shanghai and Shenzhen listed shares via a cross-border trading program.

On the second: "there’s still over a hundred stocks that are suspended in the country, which is by far the largest in any emerging market. It’s about 5 percent of the value of the index," Fernandez said.

And the market-data issue "is a big one," the MSCI chief said.

"We continue to be very committed to the process and we believe that the Chinese authorities, based on every discussion we have had, continue to be very committed to the pace of reform," Fernandez said. "It’s just that at times it’s faster and at times it’s slower."

An inclusion in MSCI’s indexes would raise the $6.5 trillion onshore market’s profile and draw in a slice of the near-$2 trillion investors place in assets tied to emerging-market gauges. Of that, about 15 percent is passive investment, with one-third of that subset being exchange-traded funds, Fernandez said.

Only 169 mainland China-listed companies will be considered for inclusion, down from 448 under a previous proposal, and all will be large-cap shares currently accessible to foreign investors through the connect links with Hong Kong.

"If it happens, when it happens, it sets the stage for future steps," Fernandez said. "We’re trying everything we can to say ‘can we make the first step so we can get going.’"