Fools rush in

MSCI can still afford to shun China stocks

There is no hurry for MSCI to embrace Chinese shares. The index compiler will shortly decide whether to add equities listed on the mainland to its global benchmarks. Though regulators have made some reforms, memories of last summer’s mass stock suspensions and state intervention in the market are still fresh. Another delay would give China more reason to open up.

Any decision to include Chinese “A-shares” in MSCI’s Emerging Markets Index would be a gradual process. The US firm would probably start by counting just five per cent of the value of mainland stocks in its indices. AXA Investment Managers estimates that this would attract a $21-billion inflow of foreign funds — equivalent to a third of one per cent of the combined $6.6-trillion market capitalisation of A-shares listed in Shanghai and Shenzhen.
 
However, the move would make Chinese shares a factor in the rise and fall of global indices, forcing fund managers to pay much closer attention to the country. Besides, the weighting would be bound to increase over time.

MSCI dodged a bullet a year ago when it decided that China did not yet make the grade. Within a few weeks, mainland markets had collapsed, triggering mass suspension of share trading and increasingly desperate efforts by authorities to prop up prices.

Since then, regulators have made incremental progress. On the plus side, they recently set clearer guidelines over how long companies can suspend their shares while restructuring or doing M&A. This should mean make share trading more predictable, while preventing such nonsense as board chairmen declaring a trading halt while they take a holiday. The authorities have also clarified rules on foreign share ownership.

Nevertheless, foreign investors seeking access to mainland China must still navigate restrictive licenses and quotas.  And while fund managers can buy some Shanghai-listed stocks through the Shanghai-Hong Kong connect scheme, a long-awaited link with Shenzhen is not yet open.

In China the real test of any law is how it is implemented. It’s still far from clear that foreign investors would be free to get their money out of the market during a sharp sell-off. By waiting a while longer, MSCI could give Chinese authorities an extra incentive to persuade foreign investors that A-shares can be trusted.