Banking & Finance

Index indignity

China puts a brave face on another rejection from MSCI

Investors look at an electronic board showing stock information at a brokerage house in Shanghai

Next year, perhaps

One of the jokes about the index compiler MSCI in Chinese financial circles is that its initials stand for “Must Short-Sell China Indefinitely”.

The gag was doing the rounds again this week as China’s A-share stocks were denied entry – for the third time – into MSCI’s benchmark indices.

For MSCI it was a difficult decision, as it knew it would upset China’s stock market regulator. “Indices that don’t contain A-shares are incomplete,” the China Securities Regulatory Commission responded on Wednesday, noting that China is the world’s second largest economy and that Chinese equities account for a growing share of the global market.

Adding insult to injury, Pakistan was given the green light to join the indices. But state news agency Xinhua professed not to be too bothered. “The decision is understandable, in light of lingering uncertainty and concerns, but might lack foresight when reviewed in the near future,” it said, adding that MSCI will conduct another review in 2017 and that it hasn’t ruled out an earlier announcement.

“It is a pity that the decisionmakers have been hesitant, again. However, the MSCI decision is a delay not a rejection – after all, the world’s second largest and fastest growing capital market is just too big to ignore,” Xinhua argued.

China’s stock market bosses had tried to respond to MSCI’s previous concerns, with tighter rules on trading suspensions and information disclosure. Restrictions on cross-border capital flows have also been loosened, allowing for more flexible remittance of funds.

But the changes proved insufficient, with MSCI saying that policymakers need to move ahead with further improvements to make the A-share market more accessible for foreign investors.

Some global asset managers had viewed the inclusion of A-shares negatively, particularly after the way that last year’s rout in the Shanghai market was handled. These reservations may have swayed the index provider’s thinking, the Financial Times claimed.

“As long as China’s stock market remains one where the regulator acts like a parent and retail investors behave like kids, and everyone still expects the government to bail out a crashing market, it won’t meet MSCI’s criteria,” Shen Meng, a director at Chanson & Co, a Beijing-based boutique investment bank, told the Wall Street Journal.

Speculators had anticipated that MSCI was going to say no, according to the Hong Kong Economic Times. The Shanghai Composite shed more than 3% on Tuesday – the day before the decision – and Hong Kong’s benchmark index also dropped 2.5% during the same session. When MSCI made the news official on Wednesday, the market rebounded 1.6%, suggesting the decision had been priced in by investors.

In fact, the people who most lamented the move were those that had taken short positions earlier this week. “Too bad I thought the official announcement by MSCI would trigger a sell-off,” one disappointed investor wrote on the weibo of WallStreet.cn.

Elsewhere, market commentators have been poking fun at the ruling via social media. “We don’t give a damn if you give us face or not. The world still turns,” Lao Ai, a well-known pundit wrote on Sina Finance. Lao then called for regulators to speed up the launch of a new scheme that allows Hong Kong and Shenzhen investors to invest in each other’s bourses. “Let us all forget MSCI. Prepare ourselves for the Shenzhen-Hong Kong Stock Link. That could be announced within a fortnight,” he suggested.

The MSCI’s decision was felt in the currency markets, however. The FT notes that the offshore renminbi, which is not subject to the Chinese central bank’s trading band, weakened as much as 0.1% to Rmb6.6155 in early trading in Asia on Wednesday. That was the yuan’s weakest level since the start of March.


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