NEW YORK/HONG KONG (Reuters) - The fourth time is the charm for Chinese stocks. After three failed attempts, MSCI has finally decided to add mainland-listed shares to its global indexes. The move will be a relief for Beijing, which got egg on its face at previous annual reviews. But the move is largely symbolic and will generate only modest inflows to the PRC.
MSCI first proposed to add domestically listed A shares to its benchmarks in 2013, but the plan was torpedoed by large asset managers who said China hadn’t taken sufficient regulatory steps to make its market more open to investors. Beijing then lobbied for inclusion as part of its campaign to get the Chinese yuan recognized in the International Monetary Fund’s internal quasi-currency, the Special Drawing Right, a step that was approved in 2015.
Concerns about the ability of foreign investors to move freely into and out of A shares led MSCI to withhold its approval in previous reviews, though. Last year the index company cited monthly limits on repatriating cash, frequent trading suspensions and exchange pre-approval requirements as reasons for its decision.
The December launch of a direct trading link between the Shenzhen and Hong Kong exchanges, mirroring an existing link with Shanghai, and a reduction in trading suspensions in recent months appear to have been decisive. The final list of 222 stocks is larger than the 169 that MSCI had indicated it was considering as recently as May.
Even so, Chinese shares won't have a big impact to begin with. They will not enter MSCI’s benchmarks until June 2018, and because the index group is including them with just a 5 percent weighting to begin with, they will represent only 0.73 percent of the Emerging Markets Index, the most widely followed in that sector.
Before the announcement, Aberdeen Asset Management estimated the move would generate inflows from index-tracking funds of no more than $15 billion. Even if the increased number of stocks produces correspondingly larger flows, that will pale in comparison with China’s roughly $7 trillion market capitalization.
As with the IMF's SDR decision, the MSCI move carries more symbolism that practical import for now. It’s one smallish step forward in the liberalization of China’s financial markets.
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