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MSCI pressures Chinese regulators over market access reforms

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Via Financial Times

Index provider MSCI increased its pressure on Chinese regulators to push through sensitive market access reforms on Wednesday, stating it will not include more Chinese stocks until its concerns over hedging and other problems are addressed.

The inclusion of so-called A shares into MSCI’s flagship emerging markets index in 2018 was expected to bring in more than $100bn in foreign investments this year. MSCI has gradually increased their weighting throughout 2019.

The company completed its final scheduled adjustment at the close of trading on Tuesday, with the weighting reaching 4 per cent in the emerging markets index, an influential benchmark tracked by global investors managing about $1.9tn.

But MSCI drew a firm line on Wednesday on conditions for inclusion of more stocks. It said in a statement that it would not hold further consultations on increasing the weighting until regulators addressed a list of concerns, including access to hedging tools, and problems with China’s settle cycle and holiday schedule.

“MSCI will launch a public consultation on further inclusion of China A shares in MSCI indexes only after all the above-mentioned concerns have been addressed by the Chinese authorities in order to continue to facilitate international investment,” MSCI said in a statement.

The company has previously asked authorities to address those problems but had not made regulatory changes a condition for future consultations.

Foreign investors have stressed for several years that increased allocation to Chinese securities would need to come hand in hand with access to derivatives such as index futures and options contracts in order to hedge against downside risks.

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Without hedging tools, funds that require volatility controls will find limits to how much they can invest in Chinese securities, said Paul Sandhu, head of multi-asset quant solutions at BNP Paribas Asset Management.

“If we were allocating to China but can’t control the volatility, then there’s a limit to how much we could allocate,” Mr Sandhu said, in reference to funds requiring volatility protection.

Regulators this year have told several foreign investment managers that such changes were under way, however there is still no clear timeframe for opening up new areas of market accessibility.

Derivatives are a sensitive area for Chinese authorities and are viewed as a channel for foreign investors to short Chinese stocks and promote volatility in the stock market, which is dominated by retail investors.

Some experiments with hedging tools have in the past resulted in crises. For example, an incident involving a large bond futures order in 1995 resulted in the collapse of China’s largest securities broker and the shuttering of the bond futures market until 2013.

MSCI has also called on Chinese authorities to resolve problems with the country’s settlement cycle, which is shorter than most other large markets and presents operational problems. China’s holiday schedule does not match that of Stock Connect, a channel used by international investors to access Chinese shares, MSCI said.

The company also cited complaints about China’s trading mechanism, which does not allow them to place single orders on behalf of multiple clients.

MSCI has been criticised this year for its inclusion of Chinese stocks such as Kangmei Pharmaceutical, a drugmaker that admitted in May to overstating cash holdings by more than $4bn.

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