UPDATE 2-MSCI deletes Shenzhen stock from indexes due to foreign ownership limits

(Adds regulator comment)

SHANGHAI/HONG KONG, March 7 (Reuters) - Global index provider MSCI said it would remove Han’s Laser Technology from its China indexes and slash the weighting of Midea Group Co, citing issues triggered by foreign ownership ceilings.

MSCI’s statement on Thursday came a day after Chinese regulators blocked foreign purchases of shares in Han’s Laser as offshore ownership of the firm neared the 30 percent limit under Chinese rules.

The ownership limit could become a bigger headache for overseas investors buying Chinese stocks, especially small- and mid-caps, as Beijing steps up efforts to attract foreign capital to counter the impact of the Sino-U.S. trade war.

However, China is not currently considering relaxing the foreign ownership restriction, Fang Xinghai, vice-chairman of the China Securities Regulatory Commission, was reported by the state-run Securities Times as saying on Thursday.

MSCI said “in light of potential investability issue for investors”, Han’s Laser will be deleted from the MSCI All Shares Indexes, effective March 11.

Han’s Laser’s removal is the first since China joined MSCI’s benchmark emerging markets index in 2018. Inclusion in an index can boost interest in, and buying of, a stock by index-tracking investors.

MSCI said last week that it was quadrupling the ‘weighting’ of the country’s A-shares in its global benchmarks. The move is tipped to draw more than $80 billion of fresh foreign inflows to the world’s second-biggest economy.

In a separate statement, MSCI said it will also adjust the inclusion factor of Midea Group to 0.5, as the current foreign holding of the stock is close to 28 percent.

Chin-Ping Chia, head of research for APAC at the MSCI, said the decisions regarding Han’s Laser and Midea were “individual securities events, not a market-wide phenomenon”.

But he warned of further decreases or deletion for Midea if room for foreign ownership continues to diminish.

Han’s Laser shares closed 3.9 percent lower on Thursday while Midea Group was off 3.1 percent, compared with a 0.5 percent increase in the broader Shenzhen Composite index .

Han’s Laser is also the first stock to be suspended from purchases through the Shenzhen portion of Stock Connect - a platform linking Hong Kong’s equity market with the bourses in Shanghai and Shenzhen which allows foreign investors to trade mainland stocks through Hong Kong.

MSCI said it would further clarify the treatment of China stocks under the Stock Connect scheme given the accessibility issues investors face due to foreign ownership restrictions in mainland-listed firms.

Rival index publishers FTSE Russell and S&P Dow Jones Indices will both start adding yuan-denominated Chinese shares to their global benchmarks this year.

Foreign inflows into the country’s stock market are expected to double this year from last year to 600 billion yuan ($89.37 billion), according to China’s securities regulator.

Reporting by Samuel Shen and Noah Sin; Additional Reporting by Jennifer Hughes and Julia Fioretti; Editing by Sam Holmes and Kirsten Donovan