Index provider MSCI (NYSE: MSCI) said Tuesday it is delaying the addition of China’s A-shares to its global indexes until the country resolves some of the index provider’s concerns, including the quota allocation process, capital mobility restrictions and beneficial ownership.
After surging Monday in anticipation of MSCI promoting A-shares to its global indexes, U.S.-listed A-shares tumbled on Tuesday. Shares of the Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (NYSEArca: ASHR), the largest U.S-listed A-shares ETF, lost almost 1.9% during regular trading hours Tuesday and are off another 1.3% in after-hours trading. The KraneShares Bosera MSCI China A ETF (NYSEArca: KBA), the only A-shares in the U.S. tracking an MSCI index, was down 2.1% Tuesday, trimming its year-to-date gain to 51%. The top five non-leveraged ETFs this year are all A-shares funds. [Waiting on MSCI, A-Shares ETFs Rally]
MSCI did note that A-shares, the stocks trading on China’s mainland in Shanghai and Shenzhen, remain on track for inclusion in MSCI benchmarks, such as the MSCI Emerging Markets Index, after China resolves issues related to market accessibility.
Regarding the Renminbi Qualified Foreign Institutional Investor (RQFII) scheme, which allows the funds to purchase A-shares equities, MSCI said, “Global investors told MSCI that having reliable access to quota is a critical requirement.”
Investors believe they should be given A-shares quota in-line with their size, an issue that is of particular importance to passive managers, notes MSCI. ASHR and its small-cap cousin, the Deutsche X-trackers Harvest CSI 500 China A-Shares Small Cap Fund (NYSEArca: ASHS) have, at several points during the short trading histories, had to limit creations of new shares, due to robust investor demand forcing the ETFs to bump up against their RQFII quotas. [Another Creation Limit for an A-Shares ETF]
“Liquidity is a critical component of the investment process. Regardless of the channel they use, investors say that they need access to daily liquidity. They believe that this access should apply to all investment vehicles,” according to MSCI.
MSCI’s decision to delay the addition of A-shares to its global benchmarks is not surprising. Earlier this month, the index confirmed such a delay was possible. However, MSCI did note it could move to add A-shares to its global indexes outside of its regular market classification schedule if China moves to resolve the index providers concerns.
On May 26, MSCI rival FTSE Russell said it will transition A-shares into global benchmarks, meaning A-shares will eventually join the Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO), the largest emerging markets ETF by assets. However, $1.7 trillion tracks the MSCI Emerging Markets Index, the underlying index for the iShares MSCI Emerging Markets ETF (NYSEArca: EEM), meaning MSCI’s treatment of A-shares is widely followed by global investors. [A-Shares ETFs Surge on FTSE News]
At the end of the first quarter, there was $9.5 trillion in global assets benchmarked to MSCI indexes.
Tom Lydon’s clients own shares of EEM.