Mainland China stock markets not quite ready for incorporation into global stock indexes

BOFIT Viikkokatsaus / BOFIT Weekly Review 2015/24

​On Tuesday (June 9), the global stock index provider MSCI announced that China’s yuan-denominated A-shares were still ineligible for inclusion in its Emerging Market (EM) stock index. Despite substantial liberalisation of China’s capital markets during last year such as the stock connect of the Shanghai and Hong Kong exchanges, the extension of the RQFII (renminbi qualified foreign institutional investor) programme to several new cities, as well as specification of tax rules for capital gains, MSCI noted that making portfolio investment to China remains difficult. Investor roadblocks include the inflexibility, unpredictability and the lack of transparency of the current quota system, as well as limits on capital mobility and liquidity of many investment instruments. Suspicions also linger about protections for “beneficial owners” in the investment chain, despite efforts of the China Securities Regulatory Commission (CSRC) to clarify rules.

MSCI said that China is progressing at a good pace in resolving its accessibility issues, and that the ultimate inclusion of mainland A-shares into the MSCI EM index would happen gradually. The weighting of mainland Chinese H-shares listed in Hong Kong in the MSCI EM index is already about 25 %, and over the next year the index will incorporate shares listed elsewhere abroad. Adding mainland A-shares to the EM index starts after overcoming technical hurdles related to investing. The opening up of China’s capital markets to the world and increasing A-shares to their full weight in the indexes could, by current estimates, lead to a weighting of Chinese shares in the MSCI EM index of as much as 44 %. Alternatively, MSCI could distinguish China with its own index as it does for several large developed economies.

Share indexes guide the actions of many investors. Changes in the weighting of indexes like the MSCI EM would force adjustments in stock markets and capital flows.

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