Chinese stocks have gained direct entry to MSCI’s global benchmark equity index for the first time, marking a milestone in Beijing’s efforts to draw international funds into the world’s second-largest market.
The move means mainland stocks, known as A-shares, will next year be included in MSCI’s flagship emerging markets index, obliging the estimated $1.6tn of investment funds that track the index to buy mainland equities.
The index provider’s decision opens a new front in investors’ long-running debate over whether, and how, to introduce domestic Chinese securities into international portfolios.
China’s domestic equity and bond markets are the second- and third-largest in the world, respectively, yet foreigners hold just roughly 2 per cent of each. Three previous proposals by MSCI to include mainland stocks were rebuffed by the index provider’s stakeholders — mostly large asset managers.
Investors’ wariness has centred on China’s weak corporate governance, concerns over how it polices its stock markets and the difficulties money managers face when repatriating funds on demand. Anxiety about the latter was amplified by Beijing’s heavy-handed response to the 2015 market crash, where at one point, more than half of all stocks were suspended from trading and officials forced local institutions to contribute to a bailout fund.
This year’s successful proposal sidestepped most of those concerns by including only A-shares that are already traded through the Stock Connect that links Hong Kong with Shanghai and Shenzhen. The Stock Connect operates as a closed system where international investors buy A-shares in Hong Kong dollars and also cash out in that currency, meaning they are subject to fewer capital restrictions than if they bought the shares in the mainland using renminbi.