Index provider MSCI Inc said on Friday it welcomed China's move to liberalise a major cross-border investment scheme, but that the country's handling of a summer stock sell-off raised concern over the liquidity of its markets. The announcement was the first formal update from the New York-headquartered firm after it said in June it would not include yuan-denominated Chinese shares in its emerging markets benchmark because it remained too difficult for investors to get their money in and out of China.
MSCI's announcement followed a decision by China's foreign exchange regulator to relax rules for its $81 billion Qualified Foreign Institutional Investor (QFII) scheme which allows some foreign investors to purchase stocks and bonds in China. The State Administration of Foreign Exchange said on Thursday it would make it easier for firms to secure investment quota, reduce the amount of time capital must be locked up, and allow funds to move money in and out of stocks daily in what market-watchers saw as a push for MSCI inclusion.
Inclusion in the MSCI emerging markets benchmark, which is tracked by more than $1 trillion in investor assets globally, would be a coup for China as it seeks to boost its stock markets, which slumped 25 percent during January, and prop up its currency. MSCI said the announced changes to the QFII scheme marked a "significant step" towards making mainland Chinese stocks accessible by foreigners, but added Chinese regulators' handling of a summer sell-off had created new concerns for investors.
China's markets slumped 40 percent over June through October, prompting regulators to cap share sales and clamp down on futures trading, while more than half of listed mainland companies suspended trading of their shares. "In recent months, international institutional investors have expressed concerns over trading and liquidity issues created by the China Securities Regulatory Commission's (CSRC) market interventions and widespread market trading suspension after the market sell-off in the second half of 2015 and early 2016," MSCI said.
Investors also want China to remove a daily trading limit on a Hong Kong-Shanghai trading link, and continue to harbour concerns over whether their ultimate ownership of assets held under the scheme is recognised in Chinese law. MSCI said it will begin gathering feedback on the QFII changes and other market developments from investors in April and will announce a decision on inclusion of Chinese stocks at its June review.