MSCI Inc. held off from adding China’s mainland stocks to its benchmark indexes, opting to work with the nation’s securities regulator to try to overcome remaining obstacles to inclusion. Chinese shares dropped.
The index provider expects to put yuan-denominated equities, also called A shares, in its global benchmarks after settling investor concerns about accessibility and share ownership through collaboration with the China Securities Regulatory Commission, according to a statement issued Tuesday. MSCI said a decision on inclusion may come at any time. The Shanghai Composite Index retreated as much as 2.2 percent, before paring declines to 0.8 percent at 9:50 a.m. local time.
The possible addition of mainland equities to MSCI’s global indexes has been a divisive issue among fund managers. Even as China’s stocks more than doubled over the past year, foreigners have been cautious about entering a market where retail investors account for 80 percent of trading.
While detractors want China to further relax investment curbs and provide more tangible proof of share ownership, funds in favor of inclusion point to the ease of access through the Hong Kong exchange link and clarified tax laws. For Chinese authorities, who met with money managers in the U.S. this year to make the case for MSCI inclusion, gaining acceptance is part of a broader effort to professionalize the stock market and boost the yuan’s role in global finance.
Foreigners are still subject to quotas under the Shanghai-Hong Kong exchange link, which started in November and allowed anyone with a Hong Kong brokerage account to gain access to the mainland stock market. Overseas investors can buy a net 13 billion yuan ($2.1 billion) of mainland shares each day and there’s an aggregate quota of 300 billion yuan.
MSCI said in its statement that it will work with Chinese regulators to establish policies that resolve the “remaining accessibility issues.” Those include giving investors access to quotas commensurate with the size of their assets under management, improvements in liquidity and further clarification of share-ownership rules.