Suspensions on China's A-Share Market Are Foreign Investors Biggest Concern, MSCI CEO Says
Zhou Ailin
/SOURCE : Yicai
Suspensions on China's A-Share Market Are Foreign Investors Biggest Concern, MSCI CEO Says

(Yicai Global) June 27 -- MSCI Inc. [NYSE:MSCI] and foreign investors are most worried about the seemingly arbitrary nature of suspensions on China's A-share market following its inclusion in the MSCI Emerging Markets Index, MSCI Chairman and Chief Executive Henry Fernandez said.

The global index supplier announced on June 21 after four consecutive years of assessment that the A-share market will be incorporated into the MSCI Emerging Markets Index and the MSCI ACWI Indexes next June.

With mechanisms connecting the markets of mainland China and Hong Kong, the imbedding of China's A-shares should be smooth, and MSCI's decision will not be reversed, Fernandez said.

"Large-scale suspensions add uncertainty to transactions and give foreign investors the impression that the A-share market is 'arbitrary,'" he said. "Suspensions are more common in China than in other countries."

Some 264 large-cap securities were slated for inclusion, but 10 of them had recently been suspended at the time of review, 22 had been suspended for a prolonged period and 10 were not accessible through interconnection mechanisms, so MSCI ultimately selected 222 securities, said Fernandez.

Compared to on other emerging markets, an unprecedented number of securities have experienced trading halts on China's A-share market, but the volume of A-shares halts is declining, he said.

Trading of Chinese companies' shares has been spontaneously suspended in many cases, which was not good for anyone, Fernandez said. If shares of a firm are unexpectedly taken off the exchange, that company will be knocked out by MSCI and its image will be marred, he said. Trading halts confine investors, said Fernandez.

On July 7, 2015, more than 500 A-share companies that were rattled by the stock market crash applied to join those already suspended. Before the next day of trading began, over 1,200 securities, representing more than 40 percent of the market, were not trading.

Chinese preapproval requirements for overseas listings of financial products (including exchange-traded funds) linked to the A-share market contributed to its three failed attempts to join the MSCI Emerging Markets Index.

"Global investors have access to a whole lot of channels for entering a country's stock market," Fernandez said. "They can choose proactive management, they can replicate indexes such as the MSCI Emerging Markets Index for passive management, or they can take advantage of structural products or derivatives in the over-the-counter market, including return swaps, options and stock index futures, to name a few. If we were to design derivatives of A-shares now, it would be necessary to solicit comments from each stock exchange one product after another, which is not in line with international standards."

Although the China Securities Regulatory Commission and China's stock exchanges are aware of the importance of eliminating preapproval rules, they need time to adapt, he said.

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Keywords: A-Share , MSCI Index , Trading Suspension , Financial Derivatives , Financial Regulation , International Investors , STOCK EXCHANGES