PUTTING ITS HOUSE IN ORDER
These wide ranging issues were definitely a factor in the MSCI’s decision to refuse the country entry over the past three years. The index provider also cited the lack of investor protection laws as well as capital controls which were in evidence in 2015 after the stock market crash. Officials responded by suspending more than half of all stocks from trading and then further exacerbated the situation by forcing local institutions to contribute to a bailout fund.
The Chinese government has addressed some of its concerns by introducing new rules that limits under what circumstances and for how long Chinese companies can halt trading. Moreover, President Xi Jinping has been making strides in his anticorruption campaign launched when he took over the helm in 2012 and repeated in his speech at the Communist Party Congress in October. This has triggered a spate of investigations and the punishment of hundreds of thousands of government officials. However, political pundits also believe that this could be a way to eliminate key members of the opposition.
While recognising these initiatives, the MSCI is also allowing China more breathing room than in the past with a less rigorous standard of evaluation and more gradualist approach. Under the newly proposed system, it may choose to include fewer stocks initially, sourced under simpler institutional arrangements than those offered in previous years.
“It will be a slow process, and as the inclusion factor increases, the weight of China can rise significantly over time,” Corbetta adds. “We anticipate international investors will begin to look a lot more closely at Chinese domestic-listed companies, of which there are many of a very high standard. We also think those companies will learn to interact with the requirements of international investors, leading to the rise of a domestic Chinese blue chip universe.”
Many market participants though believe that the real catalyst behind the MSCI decision was the Stock Connect programme which made its debut in November 2014 between the Shanghai and Hong Kong exchanges and was extended in late 2016 to encompass the Shenzhen market. It enables foreign investors to trade local China A-shares without an overall aggregate quota or capital mobility restrictions. Given the improved access, the MSCI selected the link to trade the A shares over the Qualified Foreign Institutional Investor (QFII)/RMB Qualified Foreign Institutional Investor (RQFII) programmes.
Historically, as research from iShares points out foreign investors were only able to buy about half of China’s $8trn plus equities market via H-share, Red-Chip, P-Chip and foreign-listed equities. The remaining half or A-shares were available only under strict quotas set by the Chinese government.