Shanghai and Shenzhen shares have a greater chance at joining a major emerging-market stock index after recent market reforms, though a smaller pool of issues under consideration means entrance will do less than investors and China’s government would like.
MSCI of the U.S. is soliciting institutional investors’ input on whether to include A-shares, or yuan-denominated shares listed on the Chinese mainland, in its Emerging Markets Index. Citigroup gives China’s bid a 51% chance of success, in light of recent reforms.
The so-called Qualified Foreign Institutional Investor, or QFII, scheme was one key factor. This scheme was long foreign institutions’ only option for buying A-shares. Each entity’s dealings were subject to strict quotas, and the value of remittances was capped at 20% of net assets each month. MSCI naturally refused to include shares in its index that could not be freely bought and sold, and Beijing was slow to change the system to address those concerns.
The index operator has also looked askance at Chinese listed companies’ ability to halt trading of their shares at will — an option that, at one point, roughly 50% of companies had taken. A need for prior approval to create products incorporating A-shares also left MSCI leery.