China-sceptics should review benchmark settings following the recent inclusion of some mainland shares in MSCI mainstream equity indices, according to Tim Atwill, head of investment strategy at global consulting firm, Parametric.
In June this year, MSCI added a smattering of China A shares to its mainstream equity indices – the first of the major global index providers to do so.
While the MSCI China toe-dipping exercise amounted to only about 0.75 per cent of the underlying benchmark, over time the allocation to Chinese shares will rise to about 15-20 per cent – commensurate with its status as the second-largest stock market in the world.
Nonetheless, Atwill says in a research note that Chinese markets remain difficult to classify by developed world standards.
“Accordingly, investors would be well served to make sure they agree with MSCI’s assessment of market accessibility – and, if not, to move to a benchmark that either excludes A-shares or allocates them in a way that better reflects investors’ A-share concerns,” he says in the note.
Atwill says index providers face the “historically unique problem” of marrying China’s strong economic credentials (now the world’s largest economy) and “large, liquid” stock markets with poor accessibility standards.
The note says China A-shares remain subject to a daily quota, government control of capital flows, and open to abuse by companies that can “halt trading at their own discretion”.
“… China is a nation that’s on the brink of being economically developed but still retains market practices more commonly associated with a frontier-market country,” he says. “This conundrum has led to MSCI’s delay in its initial inclusion of A-shares, and even now MSCI is choosing to include only a small fraction of their representative weight while it encourages Chinese authorities to make needed market reforms.”
MSCI said in a release last week that the China A-shares index transition was “smooth and no major concerns were raised”.
Last week, the benchmarker also revealed it would include Saudi Arabia in its emerging markets index as of next June. Following the upgrade, Saudi Arabian stocks would represent 2.6 per cent of the MSCI Emerging Markets Index.
Meanwhile, MSCI raised Argentina from frontier status to emerging market – albeit restricting index holdings to offshore-listed Argentinian companies.
Sebastien Lieblich, MSCI managing director and global head of equity solutions, said in a statement: “By supporting the inclusion of Saudi Arabia and Argentina in emerging markets, international institutional investors confirmed that they are now able and ready to access and operate in these markets.
“These inclusions will result in the expansion of the global investment opportunity set and allow for greater diversity in the MSCI Emerging Markets index, which is important to investors.”