Reprieve for India as MSCI snubs China

Move will help India attract higher share of emerging market flows, say experts

MSCI Inc’s decision to keep mainland China shares out of its benchmark indices is  relief for Indian markets.

The index provider for the third time denied entry to mainland China shares, known as China-A shares, in its benchmark MSCI EM (emerging market) index, surprising many, including Goldman Sachs.

Inclusion of China-A shares in the MSCI EM index would have reduced India’s weight by up to 1.7 percentage points, forcing passive investors to reallocate money from the Indian stock market. India’s weight in the MSCI EM index is 8.5 per cent, below South Korea, Taiwan and China non-A shares (traded in Hong Kong).

“In the emerging market pack, India is one of the important players. It stands to benefit from this move. There is a likelihood that India might receive more inflows,” said Anita Gandhi, director, Arihant Capital Markets.

There were worries that India might witness outflows of around $2 billion had MSCI included China-A shares in its emerging markets index. Jyotivardhan Jaipuria, founder and managing director, Veda Investment Managers, said, “Since they have maintained the status quo, the fear that funds will flow out will not materialise.”

The implication of this move was evident in Wednesday’s trade. The Indian equity markets rallied over 1 per cent, partly as a result of the MSCI move.

Experts said India might attract a higher share of emerging market  flows in the near term because prospects for the domestic market had improved.  

MSCI has said it will reassess its decision on including China-A shares in 2017 and has not ruled out an earlier review.

Remy Briand, managing director and global head of research, MSCI, said, “MSCI will monitor the implementation of the recently announced policy changes and will seek feedback from market participants.”  He said the proposal to include these shares would be kept alive in the 2017 market classification review.

“MSCI does not rule out a potential off-cycle announcement should further significant positive developments occur ahead of June 2017,” Briand added.

MSCI had in April laid out its concerns for not including China-A shares in its global benchmarks. Analysts said China had addressed some of the concerns.

“The key stumbling blocks appear to have been the monthly capital repatriation limit and the Chinese exchanges' pre-approval restrictions on launching A-share index-linked financial products,” said a note by Morgan Stanley analysts led by Laura Wang.

Morgan Stanley had assigned a 50 per cent probability for inclusion of China-A shares in the MSCI index. “We expect a near-term adverse market reaction as some market commentators placed the probability of inclusion higher than our own 50/50 call,” it said in a note.

Chinese markets on Wednesday shrugged off the initial disappointment over the MSCI decision and ended more than one per cent higher.