Singapore-based Orchard believes that China A-shares are not yet ready for inclusion across all the MSCI indices.
“Until the share class is, if not fully fungible or at least more easily available to all investors, it probably won’t happen,” he said during a recent media briefing in Hong Kong.
Last June, MSCI rejected the inclusion of A-shares on its indices for the third time since 2013.
However, Orchard expects that it will eventually happen over time.
“The direction of travel here is quite clear. The authorities in China want all of these financial instruments included in the globally traded indices,” he said.
Regional index impact
“[If full inclusion happens], Greater China will be dominant in the regional index.”
In the MSCI Asia ex-Japan index, the Greater China region is already dominant, accounting for 58% of the index, according to the index’ factsheet.
However, a full inclusion would make China account for 45% of the index from the current 31%. Then the Greater China region would account for 66% of the index, according to Fidelity.
Source: Fidelity
Turning to the MSCI Emerging Markets Index, Chinese companies listed outside China represent around 26% of the index, according to the index’ factsheet.
A full inclusion of A-shares would bring China to 40% of the whole emerging markets index, according to a separate MSCI document. The Greater China region would then account for half of the index.
More improvements needed
Although international access to China’s A-shares continues to improve, investors find that there are still difficulties.
According to an MSCI consultation last year, investors identified obstacles that Chinese regulators should address. They are: effective implementation of QFII policy changes and the removal of the 20% monthly repatriation limit; effective implementation of new trading suspension treatment; resolution of pre-approval requirements by the local exchanges on launching financial products.
“The doors are being slowly opened, but it has to be done in a very managed way,” Orchard said.
Currently, foreign investors can access the Chinese market through the renminbi qualified foreign institutional investor (RQFII) and qualified foreign institutional investor schemes (QFII), as well as the Shanghai-Hong Kong-Shenzhen Stock Connect programme, he said.
China’s RQFII and QFII schemes allow foreign institutional investors to invest in onshore assets using offshore RMB and US dollars, respectively.
Fidelity is able to invest in onshore assets with its RQFII and QFII quotas of around RMB 460m ($66.9m) and $1.2bn, respectively.
It is also the first foreign asset manager that obtained a private fund license in China, which will allow the firm to create onshore investment products for eligible Chinese institutional and high-net-worth investors.
Currently, the firm has half a dozen investment analysts in China, according to Orchard.
