MSCI Declines Adding China A Shares To Emerging Markets Index On Global Investors' Continuing Concerns

In a much anticipated announcement, the widely-followed global index provider MSCI Inc. (NYSE:MSCI) said Tuesday that it will not be adding China’s local-currency shares to its benchmark emerging markets index. The inclusion of China’s local currency shares, known as A-shares, had been widely anticipated by both Wall Street and investors across the globe.

The decision against the inclusion of these shares presents another setback to China’s efforts to join international markets. At a time of slowing economic growth and capital leaving the country, the move was expected to bring tens of billions of dollars into China’s stock market. The MSCI Emerging Markets Index is massive, as it is followed by money managers across the globe with upwards of $1.5 trillion in assets. The move is also a blow to Chinese authorities, who were hoping to see more foreign capital come into their stock market.

The MSCI said that due to investor concern over the openness, transparency, and capital mobility caused them to believe the A shares were not ready for addition. In a statement, global head of research at MSCI Remy Briand said the following:

“International institutional investors clearly indicated that they would like to see further in the accessibility of the China A shares market before its inclusion in the MSCI Emerging Markets Index.”

Though Chinese regulators have stepped up their reform efforts in the time from last year when the MSCI also decided to not include the A shares, it seems as though they will need to do more. So far steps these regulators have taken include creating new rules that limit how long companies could suspend trading in their shares and allowing foreign money management funds to take bigger stakes in the market, but investors are not quite yet convinced about the effectiveness of these actions. Other issues investors have include a fear that the government may impose new controls in the next market selloff, and issues such as not being able to remove more than 20% of their investments each month.

As mentioned, MSCI made the same decision last year, as it has been following the Chinese market for several years. At that time, the decision to not include the A shares caused Chinese stocks to fall approximately 40%, and $600 billion of market value was knocked out in the course of just a few weeks. A major sell off like the one last year isn’t expected to occur again though, as share prices are already at relatively low levels.

Many investors have smaller holdings in China at this point, trimming the amount invested in the country’s markets due to the extreme prop-up measures taken Chinese market regulators in the last year, which included government-backed agencies buying large amounts of stocks and devaluing the country’s currency.

Without the inclusion of the A shares in the MSCI Emerging Market Index, most global investors will continue to exclude China’s $7 trillion Yuan-dominated market, the second largest stock market in the world behind the U.S. MSCI still said it could add the A shares to their emerging markets index this year though, but only if they saw significant, positive developments from Chinese regulators that would access some of the issues global investors currently have with the Chinese markets.