China: Will its A-shares be listed in the MSCI index? - BBH

A week from now, June 20, MSCI will announce whether China's A-shares (trade in the mainland markets) will be included in its emerging market indices and will be keenly watched by investors, according to the analysts at BBH.  

Key Quotes

“A few months ago, MSCI modified its original proposal to include 169 issues rather than 448.  All of the companies in the revised proposal are accessible via the HK-connect program.  By doing so,  MSCI addresses several objections from foreign fund managers, including access and repatriation.”

“Although some global asset managers have become more sympathetic to including China's A-shares, there are plenty of reservations.  Trading halts in the mainland and suspensions in HK frustrate international investors.  In Shanghai, some 77 stocks were suspended or 5.8% of the total as of June 1, according to a Reuters report.  MSCI's stock selection sought to avoid shares that were suspended for more than a month.”

“When MSCI declined to include the A-shares last year (for the third time), it cited three main reasons, having to do with access, suspension of trading, and local regulators insisting on pre-approval for financial products that are linked to A-shares.   Limited the inclusion of A-shares to those accessible on the connect program addresses the access issue.  Suspension and market data issues appear to remain open.”

“It seems like a close call.  Chinese officials want it, and related capital inflows could help blunt the outflows.  MSCI officials seem to want to push ahead if possible to begin what appears to be a multi-year process.   Chinese shares (that trade in HK, and in ADRs) account for about 25% of the MSCI emerging market equity index.  The proposed A-share inclusion would account for about 0.5% in the index; a modest step.  Over time, the China's shares may eventually account for 40% of the MSCI emerging market equity index.”

“The squeeze, at least partly engineered by China officials, sent the yuan sharply higher in late May.    After making its point, officials seem to have pulled back, and the yuan has returned to narrow range trading since early this month.   The  IMF's authoritative report on the currency allocation of reserves.  In terms of reserve allocation, central banks appear to move at glacial speeds.  We do not expect a significant shift into yuan, which the IMF now breaks out, alongside the other reserve currencies.”