China stocks shut out of the spotlight again

Blackstone CEO: China wants the American Dream
Blackstone CEO: China wants the American Dream

Chinese stocks still aren't ready for the big time.

Index provider MSCI says it won't add shares traded in Shanghai and Shenzhen to its widely-tracked global benchmarks because of continued concerns over access to China's markets.

The decision to keep China on the sidelines means the country has yet again failed to win a vote of confidence as an attractive destination for global capital. MSCI has already twice declined to include Chinese stocks.

Still, recent changes that China has made over market regulation are "significant steps toward the eventual inclusion," said Remy Briand, managing director at MSCI. The moves "demonstrate a clear commitment by the Chinese authorities" to bring the access to the market "closer to international standards."

MSCI's indexes are an important measure for big investors. If China were added, it could expect an influx of billions of investment dollars into the domestic stock market at a time when the economy is slowing down.

But Chinese markets shrugged off the decision Wednesday. The benchmark Shanghai Composite rose 1.6%, while Shenzhen stocks gained 2.8%. Both markets had suffered steep losses earlier in the week.

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MSCI has generally been expected to eventually take a gradual approach -- for example, adding 5% of existing Chinese stocks to its indexes. Analysts at HSBC have estimated that would bring in more than $20 billion from funds that track three of MSCI's indexes.

Although MSCI said China is "on track" for inclusion in the index, as it did last year, it will only be admitted after a few outstanding issues are resolved. The organization again said it would continue working with Chinese regulators, and consider approving China for inclusion outside of its scheduled annual review, if appropriate.

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At the moment, foreign investors can invest in Chinese companies traded in Hong Kong, dubbed "H-shares," but buying into stocks traded in Shanghai and Shenzhen, or "A-shares," remains restricted.

Only institutional investors can buy into the domestic stock market once licensed and approved, and they are assigned specific investment quotas. Investors also face a limit on the amount of money they can repatriate each month.

"This limit poses a potential liquidity concern for investors who need to honor redemption outflows from their clients, and thus must be removed or substantially increased," MSCI said.

To be included in MSCI's benchmarks, shares must be open to foreign ownership and investors have to be able to move capital in and out with ease.

MSCI also said it needed some more time to review the impact of tougher rules on share suspensions that China recently announced.

China's stock markets have been on a roller coaster ride in the past year and a half. The main Shanghai and Shenzhen indexes are both down more than 20% so far this year.

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Just last year, Chinese markets surged to eye-watering highs, which prompted plenty of interest in having A-shares added to MSCI's indexes. But MSCI chose to delay inclusion then as well, an announcement that happened shortly before a massive market crash that inflicted heavy losses on many investors.

China has continued to gradually open up its markets -- a pilot program launched in 2014 connected the Hong Kong and Shanghai stock exchanges to allow for cross-border trading -- but critics say it's still not enough.

China has sought to be recognized in other prestigious global groupings. Late last year, the IMF finally approved China's yuan for inclusion in its basket of currencies that the organization uses to value reserve assets.

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