MSCI Inc’s decision to exclude China’s local shares from its global indices shows the nation must reduce trading restrictions to lure international investors to the biggest emerging economy.
China’s quota system for overseas money managers, which limits holdings to less than 3 percent of the country’s US$3.3 trillion market capitalization, is the biggest hurdle for including mainland Chinese shares in global funds, MSCI said on Tuesday after a yearlong consultation with investors.
The nation’s rules against same-day trading, controls on using multiple brokers and uncertain tax laws also deter funds, MSCI said.
A press official from the Shanghai Stock Exchange declined to comment on MSCI’s decision. The China Securities Regulatory Commission did not immediately reply to a faxed request for comment.
China will expand programs that allow foreign investors to buy local shares and will scrap quotas when conditions allow, the central bank said an annual report for last year posted on its Web site yesterday.
Instead of including China’s A shares in the MSCI China Index and MSCI Emerging Markets Index from next year, the index provider will introduce by June 27 a China A International Index as a standalone benchmark gauge. MSCI will keep the shares under review over the next 12 months for potential inclusion.
MSCI’s China proposal faced opposition from international money managers, including Fidelity Worldwide Investment and Templeton Emerging Markets Group, which told Bloomberg News in April that the plan is unworkable unless China removes the capital controls that limit access to local securities.
Under China’s existing rules, only overseas institutions that have been awarded licenses and quotas by two different regulatory bodies can invest in local securities. The combined approved quota is about US$94 billion.
International money managers gave positive feedback on China’s plan to link exchanges in Shanghai and Hong Kong, according to MSCI, which said earlier this year that it would contact between 2,000 and 3,000 global investors on its China proposal.
“China-Hong Kong connect will be a very important development,” Chia Chin-ping (謝征儐), a Hong Kong-based managing director at MSCI, said by phone yesterday. “This scheme will lead fresh element into the discussion and at this stage it is on the positive side.”
On top of barriers to accessing the Chinese stocks, MSCI highlighted investor concerns over the nation’s market structure and tax system.
China prevents traders from buying and selling the same stock in one day and limits investors to using a single broker at any one time. The Shanghai exchange lacks a closing auction system, which makes it more difficult for index-tracking investors to acquire stock at the closing price.
Uncertainty over how China will apply its tax laws has deterred some investors, MSCI said.
While the nation’s personal-income laws stipulate that gains from stock trading are subject to a 20 percent tax, the finance ministry and taxation bureau have exempted investors from the levy since 1994 to promote the development of the stock market.