China’s trading freeze can undermine MSCI inclusion

Added 13th July 2015

The recent suspension of trading in 1300 A-share stocks could delay their much-awaited inclusion in MSCI’s emerging market index, fund houses said.

China’s trading freeze can undermine MSCI inclusion

As retail investors hurried to unwind leveraged positions last week and the Shanghai composite index plunged, China’s regulators suspended trading in more than 1300 stocks, or 40% of A-shares.

The suspensions were an attempt to stabilise the market. But fund houses believe the regulatory intervention could setback China’s moves to open its markets wider to foreign investment.

 “Complacency on margin lending rules and allowing a large proportion of its domestic-listed companies to suspend trading without sound justification are likely to push back the inclusion of Chinese domestic stocks in the MSCI Emerging Markets index,” said Mauro Ratto, head of emerging markets at Pioneer Investments.

An upcoming review by the International Monetary Fund to include the Chinese renminbi in the basket of Special Drawing Right currencies may also be impacted, Ratto added.

Chinese authorities have taken a slew of measures over the last few days, which include suspension of IPOs and cuts in interest rates and banks cash reserve requirement ratios. 

On 8 July, China’s securities regulator also banned corporate executives and directors and major shareholders holding more than 5% stake in a company from selling stakes in listed companies over the next six months.

“These actions appear to be uncoordinated, confusing and not substantial enough considering the amount of margin positions and the size of the A-share market (which has a free float of RMB 40 trillion) ($6.4 trn) said Louisa Lo, deputy head of Asian equities at Schroders.

“The frequent changes of policy and rules have furthermore brought about confusion in the stock market and underscored the lack of institutionalisation and deficiencies of the China A-share market, which could further delay MSCI including A-shares in its benchmark indices,” Lo added.

In June, the MSCI put on hold the inclusion of A-shares in its emerging market index, citing concerns regarding market accessibility. It also said international investors preferred a more streamlined, transparent and predictable quota allocation process.

Tai Hui, managing director and chief market strategist for Asia at JP Morgan Asset Management, said the recent market rout underscores the need to expand the investor base beyond retail traders.

“While the Chinese authorities have been concerned with foreign investors introducing additional volatility to its financial markets if the capital account is opened too quickly, the latest episode [market plunge] should reflect the benefits of having a more diversified investor base, including foreign institutional investors,” said Hui .

Despite the recent volatility, Hui still expects Chinese onshore equities to be on track to be included in global EM benchmarks in the coming years.

Opportunities amid correction

Fund houses are hunting for attractively-priced China stocks following the steep correction.

Sources believe Hong Kong-listed Chinese equities look most favourable. H-shares have been hit hard recently due to the spillover effect from the falling A-share market and concerns over Greece staying in the Eurozone.

“The recent panic-selling in the Hong Kong stock market has created a good buying opportunity for longer-term investors,” said Lo, from Schroders.

“We see more value in Hong Kong-listed China stocks for longer-term investors as their valuation has become attractive after the recent correction,” said Lo.

The Hong Kong stock market is more institutionalised and disciplined than the onshore market, she added.

BlackRock Asset Management said it remains relatively cautious on A-shares and believes valuations are stretched, especially in small- and mid-caps.

Instead, the firm is selectively investing in H-shares, which the fund house believes are still attractively valued on an absolute basis and relative to regional and global peers.

BlackRock has also warmed to Macau stocks.

“We are growing more positive on Macau as the government eases visa restrictions for mainland transit visitors. Since last year, the policy has been restrictive and had a negative impact on the gross gaming revenue (GGR),” the firm said in a recent research note.

“The relaxation of the transit visa policy should provide the GGR a medium-term boost and to investors a signal that the restrictive policy cycle is ending."


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