SHANGHAI, March 24 An executive charged with exploring including China's A shares in index compiler MSCI's Emerging Markets Index said on Monday that around half of the institutional investors he'd met with so far opposed the idea given uncertainty about taxation, volatility and repatriation of profits.
Chia Chin Ping, managing director at MSCI, estimated that the inclusion of mainland listed A-shares in the index could move as much as $12 billion into China's struggling stock markets as mutual funds and pension funds reallocated their portfolios, but no decision has been made yet given resistance by some funds.
"Ultimately the decision is not going to please everyone," he said in an interview with Reuters on Monday. "In this particular issue I think it's going to be complex because we have pockets of investors who can really invest in A shares and there are pockets of investors that haven't, or haven't started to do so," he added.
MSCI is considering "partial inclusion" of A shares into its emerging market index so that the index better reflects the importance of China's equities markets, but also captures the constrained condition of capital flows across China's borders.
In the first phase of inclusion, MSCI would make A shares comprise 0.6 percent of the total index, bringing China's total share of the index, including shares in Chinese companies trading overseas, up to 19.9 percent.
This would require funds that use the index as a benchmark to buy equivalent amounts of A shares, resulting in a gradual flood of foreign capital into Chinese stock markets if the move is approved in June.
But Chia said the investors who resisted the suggested were concerned by the way Beijing currently manages foreign portfolio investment into Chinese assets, which is currently subject to a wide swathe of restrictions on how much can be purchased, when it can be sold, and how it will be taxed.
China currently operates two programmes that allow foreign investment in Chinese stock markets: The dollar-denominated Qualified Foreign Institutional Investors (QFII) programme and the Renminbi Qualified Foreign Institutional Investors (RQFII) programme.
Both programmes require foreign fund managers to apply for quotas, which can then be used to trade in stocks and bonds, but they can only remit their profits out of the country once a month and the way the profits will be taxed has never been made clear with some funds complaining that domestic banks inconsistently withhold tax on behalf of the government without actually passing it on.
Foreign appetite for Chinese equities has also been qualified in recent years, given the high volatility and long-term underperformance of Chinese stocks compared to other domestic asset classes.
The CSI300 index which tracks the largest tickers in Shanghai and Shenzhen, is still down around 65 percent since a high struck in 2007.
While regulators have consistently argued in public that this presents a massive buying opportunity, with some bluechip stocks, especially banks, trading near book value, that hasn't convinced the mom-and-pop retail investors who dominate China's stock market transactions.
As of end-February, China had issued total quotas of $52.3 billion under the QFII programme and 180.4 billion yuan ($29 billion) under the RQFII programme.
On March 20, the Shanghai stock exchange further loosened restrictions on QFII and RQFII investors, allowing them to own up to 30 percent of a given company's shares, up from 20 percent previously, and removed other restrictions on investment in the recently launched preferred shares scheme and asset-backed securities, among others.
But there is still a substantial debate about when and whether Beijing will move to meet MSCI's most important ultimate requirement: allowing foreign capital to flow freely in and out of China.
"We hope that regulators will release more positive information and policy changes, this will all help change the direction of the debate," said Chia.
(Reporting by Pete Sweeney and Natalie Thomas; Additional reporting by David Lin; Editing by Matt Driskill)