China on Wednesday brushed off stock index firm MSCI's decision to exclude the country's A shares from its influential global equities index, saying that the gauge cannot be complete without the Chinese stocks. The country's markets were up by the close despite the rejection, leading to speculation that Beijing had intervened in an effort to prop up confidence.
It was the third year in a row that the global equity index provider left China out of its Emerging Markets Index, which guides the allocation of billions of dollars of investments. Inclusion could have helped steer more foreign portfolio investment into China at a time when the country is fighting off capital flight and a downturn in foreign direct investment.
But Beijing appeared to be unfazed by the MSCI decision, claiming that the "A" shares were anyway becoming "more influential" in the world. "Any international indexes without China's 'A' shares are incomplete," Deng Ge, spokesman of industry watchdog the China Securities Regulatory Commission, said in a statement.
Chinese markets had fallen for several consecutive days on anticipation of MSCI's move but received the announcement with apparent calm on Wednesday. The benchmark Shanghai Composite Index closed up 1.58 percent to 2,887.21 while the Shenzhen Composite Index jumped 3.12 percent to 1,889.87, after both dropped in early morning trading.
"It's a sharp reversal so there has to be some government intervention," said Francis Lun, Hong Kong-based chief executive officer at Geo Securities, according to Bloomberg News. "The Chinese government never wants to see the market falling too much." China has provided greater access to its domestic, renminbi-based capital markets in the past year, MSCI said, including last week offering US investors a $38 billion investment quota to buy Chinese assets.
But MSCI said China still maintains problematic restrictions including a 20 percent monthly repatriation limit, which it called "a significant hurdle for investors," and too many restrictions on new financial product offerings. "International institutional investors clearly indicated that they would like to see further improvements in the accessibility of the China A shares market before its inclusion in the MSCI Emerging Markets Index," said Remy Briand, MSCI Managing Director.
At the same time, Briand credited Chinese authorities with having cleared up other deterrents to foreign investors, including issues on beneficial ownership of shares and regulations on trading suspension. "They demonstrate a clear commitment by the Chinese authorities to bring the accessibility of the China A shares market closer to international standards," he said. Deng insisted that China's capital market reform agenda will not be influenced by MSCI's decision.
"Building a long-term stable and healthy capital market is our own need," he said in the statement. "MSCI's decision to put off the inclusion will not affect the progress of China's capital market reform and opening up or its market-oriented and law-based direction."
Foreigners wanting to buy Chinese shares have been mostly restricted to "B" shares denominated in US or Hong Kong dollars and traded in Shanghai and Shenzhen, or "H" shares traded in Hong Kong. Those restrictions have kept international money out of what are now some of the world's largest markets by capitalisation.
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