China Is Opening Up Faster Than You Think, MSCI CEO Says

(Bloomberg) -- Hours before announcing whether it will lift China’s weight in global stock indexes, MSCI Inc.’s chief executive officer said the country’s progress toward transparency has quickened.

“China is opening up faster than most people believe or think,” Henry Fernandez said at a meeting with reporters and analysts in New York. “We do not see any regression of that. If anything, we see a speeding up.”

Billions of dollars tracking index funds hang on the decision by MSCI, one of the big three global index compilers, expected Thursday night. The firm last year proposed a fourfold increase in the weighting of China-listed equities, subject to a client consultation. Going through with that plan would push China-listed shares to 2.82 percent of the MSCI Emerging Markets Index from the current 0.71 percent.

“We like what we see” in China’s evolution, Fernandez said. The issue becomes “what is the pace?” One risk is that progress toward opening reverses, he said, with things like trading suspensions recurring in periods of volatility. MSCI takes into account a host of transparency elements in its index decisions, most of them pertaining to market structure.

Volatility remains the rule in A shares, which needed about a month to surge into a bull market that featured a 5.6 percent rally in the Shanghai Stock Exchange Composite Index on Monday. Foreign investors have been net buyers virtually every day in February and poured hundreds of billions of yuan into the market in 2018 via exchange links with Hong Kong.

“We’ve seen a dramatic turnaround in investors sentiment toward China over the years,” said MSCI’s president, Baer Pettit. On asset managers looking for a presence there, Fernandez said: “Most of them are wait and see, but there are some leading firms wanting to participate in China.”

Technically, MSCI will disclose whether it’s lifting a cap on free-float-adjusted market value to 20 percent from 5 percent for yuan-denominated stocks. The implementation would occur in two stages this year and mean that A shares may reach the 2.8 percent threshold by August, according to a consultation paper. MSCI will also decide whether to make equities listed on the tech-heavy ChiNext board eligible from May, and mid-cap stocks from 2020.

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