Goldman Less Upbeat on MSCI Adding China A-Shares Than Last Year
(Bloomberg) -- Will Chinese A shares finally be included in MSCI Inc.'s global equity indexes on June 20? Goldman Sachs Group Inc. thinks there's a decent chance, though it is less certain than it was a year ago.
The odds are 60 percent in favor of A shares being included at MSCI's annual review, according to Goldman Sachs, which last year predicted a 70 percent chance of inclusion only for the index compiler to decide against bringing China into the fold.
Goldman Sachs strategists Danny Suwanapruti and Kinger Lau set out the case for and against, noting that if MSCI does open the door for A shares, it could prompt equity index flows of $210 billion over the next five years.
The Case For Inclusion
- China is “significantly under-represented in global benchmarks, despite its size and influence on the global economy.”
- According to data compiled by Bloomberg, China's $6.82 trillion equity market trails only the U.S., and is bigger than the combined markets of the U.K. and Germany ($5.68 trillion).
- China has stepped up efforts to open its capital markets to foreign investors, for example with the launch of the Shenzhen-Hong Kong stock connection late last year.
- Concerns such as companies voluntarily suspending trading in their shares have been partly addressed by regulators.
- “From a global equity market representations standpoint, one could argue that China should be included into the MSCI.”
- The 20 percent monthly capital repatriation maximum allowed under the Qualified Foreign Institutional Investor program effectively limits the size and timeliness of portfolio flows.
- Investors are still concerned about the voluntary suspension of trading mechanism despite regulatory refinements in that area, as the measures haven't been tested in times of extreme market volatility.
- Pre-approval requirements like those for investment products with A shares as the underlying asset are seen as an impediment to market development.
The Case Against
What About Bonds?
Suwanapruti and Lau also examined the probability of China being included in the three main global bond indexes, saying that could potentially lead to index flows of up to $250 billion.
China has made progress in developing its bond market, including this year announcing it would allow foreign bond investors to hedge via the onshore foreign-exchange forward market and also launched a bond connect program to facilitate access, the strategists said.
Read more: China's Bond Link Aims to Spur Foreign Inflows Through Hong Kong
See also: China Plans to Open Up Bond Market Further to Lure Foreigners
But inclusion in the bond indexes is more likely to happen between 2018 and 2020 rather than this year, they said, noting that access via the China Interbank Bond Market is a cumbersome process and investors are concerned about market liquidity and repatriation, particularly in times of stress.
--With assistance from Richard Frost and Garfield Reynolds
To contact the reporter on this story: Eric Lam in Hong Kong at elam87@bloomberg.net.
To contact the editors responsible for this story: Christopher Anstey at canstey@bloomberg.net, Will Davies, Ravil Shirodkar
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