MSCI rebuffs Chinese equities for third time

SHANGHAI: China’s domestic equities were denied entry into MSCI’s benchmark indexes for a third time, a setback for President Xi Jinping’s efforts to raise the profile of mainland markets and turn the yuan into an international currency.

Policy makers need to make additional improvements to the accessibility of the A share market, according to a statement from the index compiler on Tuesday. MSCI, whose emerging-market index is tracked by investors with $1.5 trillion in assets, said it will reconsider inclusion in its 2017 review, while not ruling out an earlier announcement.

China was rejected despite a flurry of measures this year to address MSCI’s concerns, including curbs on arbitrary trading halts and looser restrictions on cross-border capital flows. The decision suggests international investors are still uncomfortable putting their money in the $6 trillion market after a botched government campaign to prop up share prices roiled global equities last year.

While Chinese authorities have demonstrated a commitment to opening the market, “investors clearly indicated that they would like to see further improvements in the accessibility,” Remy Briand, MSCI’s global head of research, said in the statement.

SIGNIFICANT HURDLE’
Investors need time to assess the effectiveness of recent policy changes on quota allocations, capital mobility and trading suspensions, the index provider said. MSCI also pointed out that a 20% monthly repatriation limit remains a “significant hurdle” for investors that may be faced with redemptions. Local exchanges’ preapproval restrictions on introducing financial products also “remain unaddressed,” MSCI said.

“The MSCI decision signals that China remains a closed emerging economy that uses market techniques like freezing the market and making it illegal to short, using government funds to buy shares — techniques that are not welcome among global investors,” Paul Christopher, head global market strategist at Wells Fargo Investment Institute, said by phone. “There are a number of market reforms in progress, but these are the decisions MSCI would want to wait for and examine.”

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. Indexes that don’t contain A shares are incomplete, according to the statement.

MARKET MOVES
The Shanghai Composite Index fell as much as 1.1% on Wednesday, before reversing the drop to jump 1.6 percent at the close amid speculation state-backed funds were boosting the market. The yuan climbed from a five-year low as traders saw signs of China’s central bank stepping in to support the currency.