MSCI has announced that we will delay including China A shares in the MSCI Emerging Markets Index.
Over recent months, Chinese authorities have introduced significant improvements in the accessibility of the China A shares market for global investors. In our 2016 consultation, investors recognized the actions taken to further open the China A shares market and highlighted that the topic of beneficial ownership has been satisfactorily addressed.
However, they generally stressed the need for a period of observation to assess the effectiveness of changes in QFII quota allocation and capital mobility policies, and to monitor the effectiveness of new trading suspension policies. In addition, the 20% monthly repatriation limit remains a significant hurdle for investors, and local exchanges’ pre-approval restrictions on launching financial products remain unaddressed.
As a result of these concerns, MSCI will retain the China A shares inclusion proposal as part of our 2017 Market Classification Review. We don’t rule out a potential off-cycle announcement should further significant positive developments occur ahead of June 2017.
Watch Sebastien Lieblich, MSCI Managing Director, discuss the announcement
MSCI MARKET CLASSIFICATION FRAMEWORK
How does MSCI assess the inclusion of markets in Emerging Markets?
The inclusion assessment is based on the MSCI Market Classification Framework described in the MSCI Global Investable Market Index methodology. For Emerging Markets, the classification depends on two criteria: (1) whether the equity market meets minimum size and liquidity requirements and (2) whether it exhibits accessibility levels for international investors that are sufficient in the context of Emerging Markets.
How is the size and liquidity of markets measured?
MSCI applies the global size and liquidity requirements used in the construction of the MSCI Global Investable Market Indexes. Specifically, the number of securities meeting these requirements will determine whether a given market meets the criterion for an investment universe. For example, any inclusion in Emerging Markets requires a minimum of three securities meeting the size and liquidity requirements.
How does MSCI gauge the accessibility level of a given market?
MSCI uses 18 distinct accessibility measures to assess the accessibility of markets. The detailed list of measures can be found in the MSCI Global Investable Market Index methodology.
How does MSCI assess each of these 18 accessibility measures?
MSCI relies on the feedback of market participants. For example, MSCI reflects regulatory changes in its accessibility assessment only after international institutional investors are able to provide meaningful feedback – in other words, only after they have fully tested and absorbed the changes.
What is the objective of MSCI’s consultation process?
We conduct an annual consultation to ensure that our indexes remain relevant and accurate investment decision support tools for our clients, and that they continue to accurately reflect the equity markets that they are measuring.
With whom does MSCI consult? Are consultations reserved for MSCI’s clients?
MSCI consults with all market participants. We try to obtain feedback from the entire investment ecosystem: asset owners, asset managers (passive and active), brokers, consultants and custodians worldwide to ensure the broadest possible representation. In addition, MSCI also engages, where possible, with local authorities, regulators and stock exchanges.
Does MSCI interact regularly with local authorities and regulators?
Yes, MSCI is often in contact with authorities and regulators around the world. MSCI is an independent conduit for information from the international investment community to local stakeholders, and vice versa.
What is timing for MSCI’s announcements?
MSCI communicates the conclusions it has made about the list of markets under review in June of each year. At that time, it also announces new markets to be reviewed for potential market reclassification in the upcoming cycle.
Who makes decisions regarding methodology and market classification?
A policy committee, comprised of senior members of MSCI’s index research team and firm leadership, has the final say on methodology and market classification questions. The committee bases its decisions on our classification framework and a thorough analysis of the feedback that is gathered in our consultation process. Any client who wishes to know more about MSCI’s decision committees can find this information in the publicly available document here.
Why does the senior decision committee need consultation feedback to make decisions?
A large component of MSCI’s decisions is investors’ experience of market accessibility, rather than merely an abstract analysis of regulatory language. We are careful to never force a decision and take market participants by surprise.
When do announced decisions take effect?
We try to give market participants plenty of lead time before the implementation of any methodology change. We announce market reclassifications at least 12 months in advance of implementation.