4 Issues That China Must Solve To Get A-Shares Included In the MSCI EM Index 1

3 obstacles

In our article, No Big Bang: MSCI Slashes Its Proposal for China A-Shares, we cited the three main obstacles that held back the inclusion of China A-shares into the MSCI’s Emerging Market Index (EEM) (VWO) in June 2016.

  1. Effective implementation of the QFII policy changes and removal of the 20% monthly repatriation limit
  2. Effective implementation of new trading suspension treatment
  3. Resolution of pre-approval requirements by the local exchanges on launching financial products

What is done?

Since then, China (FXI) (YINN) (ASHR) has come a long way in overcoming these hurdles.

  • The launch of the Shenzhen-Hong Kong Stock Connect Scheme in December 2016 intends to provide access to the approximately 1,480 Shanghai and Shenzhen stocks, which previously remained out of investor reach.
  • In February 2017, authorities in China removed the quota restrictions on fund managers under its Qualified Foreign Institutional Investor program. Accordingly, all QFIIs will be allowed to invest roughly 20% of assets under management into China without special permission.

What remains undone?

However, here’s what remains undone for China A-shares inclusion into the MSCI’s EM index (as cited in their presentation):

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  1. The 20% QFII repatriation restriction remains unchanged
  2. The number of voluntary trading suspensions in the country is now down to their pre-crises level (chart above). However, it continues to remain the highest in the world (see chart above)
  3. Discussions are still on with China exchanges to reach a resolution on the removal of pre-approval requirements on new and pre-existing financial products linked to China A shares
  4. Unique investing challenges linked to the daily limit and additional market holidays still exist
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