MSCI’s Decision on China’s Onshore Stock Market
On June 9th, index solutions provider MSCI announced that onshore Chinese stocks will be added to their broad-based international indices upon the resolution of three outstanding issues:
1) Quota Allocation Process. Global investors told MSCI that having reliable access to Qualified Foreign Institutional Investor program (QFII) and Renminbi Qualified Foreign Institutional Investor Program (RQFII) quota is a critical requirement. Specifically:
They believe that large investors should be given access to quota commensurate with the size of their assets under management. This is especially important for passive investors, whose investment processes replicate benchmarks. In addition, all investors said that they need sufficient flexibility and assurance to secure additional quota should the need arise. Most international investors have indicated a preference for a more streamlined, transparent and predictable quota allocation process.
Nevertheless, this issue may be settled in the near future as quota restrictions are consistently being loosened.
2) Capital mobility restrictions. Liquidity continues to be a concern as:
Some investors have continued to express concerns about restrictions on capital lock-up and the limit on the amount of repatriation. Finally, in the context of Stock Connect, investors feel that the daily limit imposed on the “northbound access” (access to Shanghai-listed A-shares through the Hong Kong Stock Exchange) should be lifted because it is a great source of trading uncertainty for passive investors, who typically trade on market close.
It should be noted that the Shanghai-Hong Kong Stock Connect has a daily limit on the amount of stocks that can be purchased. Reaching this limit could leave investment managers without access. In addition, the QFII program has a weekly redemption window which MSCI would like to see increased to a daily window.
3) Beneficial ownership. MSCI applauded the China Securities Regulatory Commission’s (CSRC) recent clarification on the Stock Connect beneficial ownership issue and expects this clarification to make international investors more confident in using the Stock Connect scheme.MSCI also added:
Time and actual experience, however, are needed for investors to provide their final assessments. A large number of asset owners invest through separate accounts. Because they typically delegate investment and operational decisions to their fund managers, recognizing clear title to ownership for the ultimate beneficial owners is a crucial concern.
MSCI and the CSRC will form a working group to contribute to the successful resolution of the above three issues.
To read the whole press release, Results of MSCI 2015 Market Classification Review, go to the website of MSCI.
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