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
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)
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
"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)