Investors tracking the iShares MSCI Emerging Markets ETF (NYSEArca: EEM ) should not expect any major changes to their holdings after Morgan Stanley Capital International completed its annual review of its market classification and announced it will not include Chinese mainland-traded A-shares in its key emerging market index.
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The MSCI, a leading provider of global equity indexes, announced late Tuesday that it made a decision to exclude mainland Chinese shares in its latest benchmark emerging markets index review, seemingly pushing back the inclusion of A-shares until its next review in mid-2017.
For global investors, the decision means the $7 trillion China A-share market – the second-largest in the world, after the USA – will remain largely excluded from their portfolios.
MSCI this year raised new objections to a rule that requires foreign investors to seek approval from the country’s stock exchanges before launching products based on A shares, which MSCI says could reduce investors’ ability to hedge exposure.
Beneficial ownership: This issue has been resolved, according to MSCI, as most global institutional investors are happy with the clarification released by China’s securities market regulator in May 2016.
“When China A-shares are eventually included in MSCI’s indices, Australian investors will benefit because it will create liquidity and it should reduce volatility”.
It also said it was looking forward to the “continuation of policy momentum in addressing the remaining accessibility issues”.
China’s stock markets lack catalysts.
The index provider said that it welcomed the announcement of a series of market reforms, “and will continue to monitor the positive evolution in the opening of the Saudi Arabian equity market for global institutional investors”.
In Hong Kong, both the Hang Seng index and the Hong Kong China Enterprises Index added 0.5 percent.
Chinese stocks still aren’t ready for the big time.
“Though the quotas for foreign investors have been increasing over the past few years, China’s equity market is very domestic”. The benchmark Shanghai Composite Index opened one percent lower Wednesday, but pared losses to rise 1.6 percent by close.
Also, they changed the QFII policy to address concern over quota allocation and capital mobility restrictions.
MSCI’s ruling won’t affect the nation’s capital market reforms, Deng Ge, a spokesman for the China Securities Regulatory Commission, said in a statement on the regulator’s website.
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Market-watchers and analysts said the surprise decision highlighted reservations among global institutional investors about yuan-denominated assets and Beijing’s commitment and ability to implement capital markets reform.
