AMP Capital is encouraged by MSCI’s recognition of the ongoing reform efforts in China following MSCI’s announcement that it has delayed the inclusion of China A-shares in its emerging markets index.
China A-shares will remain on MSCI’s 2017 review list for partial inclusion although MSCI has flagged that it may bring forward a decision before the scheduled timeframe of mid 2017.
AMP Capital Head of Asian Equities Patrick Ho said: “We are pleased MSCI recognises the clear improvements that have already been made with regard to the accessibility of the China A-share market for global investors. These improvements include the resolution of issues regarding beneficial ownership;enhanced regulations on trading suspension, which was flagged as one of the most critical by investors; and Qualified Foreign Institutional Investor [QFII] policy changes aimed at addressing quota allocation and capital mobility restrictions.”
MSCI’s announcement importantly has also provided clarity on the key areas requiring further improvements in order to achieve China A-share inclusion.
Full inclusion of China A-shares into MSCI’s emerging market indices is subject to the abolishment of China’s quota system, liberalisation of capital mobility restrictions, and alignment of international accessibility standards.
Mr Ho added: “When China A-shares are eventually included in the MSCI index, it will be a symbolic step for the China A-share market. The weighting will be minimal to start but it will attract greater flows to the China A-share market, particularly from institutional investors. These investors such as pension funds are also more likely to invest for the long term compared to the retail investors that make up the bulk of China A-shareholders.
“It will be a gradual process towards full inclusion – for instance, it took six years for Korea to go from 20 per cent to full inclusion – but China's growth path may be faster given the speed at which it develops. Ultimately, MSCI has stated that the future pace at which China's partial inclusion factor is raised will depend solely on the development and further reform of the Chinese market.
“There may be some short-term market volatility in China A-shares. However, the longer-term impact is likely to be minimal. The buildup prior to MSCI’s announcement was not as significant as it was in 2015 and therefore the impact of today’s announcement is not expected to be as large.”
AMP Capital has maintained a presence in China since 1997 and was the first Australian institutional investor to receive a QFII quota to invest in China.
AMP Capital used the quota to launch the AMP Capital China Growth Fund (AGF), a listed investment company on the Australian Securities Exchange. AGF provides Australian retail investors a unique opportunity to invest in the China A-share market, allowing them to access China’s growth story. AGF remains one of the few ways Australian retail investors can obtain actively-managed exposure to China, one of the world’s most dynamic economies.
Mr Ho concluded: “When China A-shares are eventually included in MSCI’s indices, Australian investors will benefit because it will create greater liquidity and it should reduce volatility. The moves undertaken by China to improve accessibility have also made the China A-share market more efficient. These efforts have already contributed to the positive development of the market, making it more attractive to international investors, and will continue to do so.”