MSCI Inc. held off from adding China’s mainland stocks to its benchmark indices, opting to work with the nation’s securities regulator to overcome remaining obstacles to inclusion.

    The index provider expects to put yuan-denominated A shares in its global benchmarks after settling investor concerns about accessibility and share ownership through collaboration with the China Securities Regulatory Commission, according to a statement issued yesterday. MSCI said a decision on inclusion may come at any time.

    Chinese authorities have been pushing for an MSCI endorsement as they seek to elevate the status of mainland markets on the world stage and make the yuan a more international currency. Efforts to open up Chinese mainland shares to foreign investors, including an exchange link with Hong Kong, have already helped propel a US$6.5 trillion surge in the value of Chinese mainland equities over the past year.

    “Some might regard it as disappointing that it didn’t happen immediately,” said Shane Oliver, the head of investment strategy at AMP Capital Investors Ltd. in Sydney, which manages about US$124 billion. “By the same token, it looks like it’s going to happen anyway at some point. It’s just a question of when. They’ve just got some remaining issues to resolve.”

    The possible addition of Chinese mainland equities to MSCI’s global indices has been a divisive issue among fund managers. Even as China’s stocks more than doubled over the past year, foreigners have been cautious about entering a market where retail investors account for 80 percent of trading.

    Global investors are still subject to quotas under the Shanghai-Hong Kong exchange link, which started in November and allowed anyone with a Hong Kong brokerage account to gain access to the mainland stock market. Foreigners can buy a net 13 billion yuan (US$2.1 billion) in mainland shares each day and there’s an aggregate quota of 300 billion yuan.

    MSCI said in its statement that it will work with Chinese regulators to establish policies that resolve the “remaining accessibility issues.” Those include giving investors access to quotas commensurate with the size of their assets under management, improvements in liquidity and further clarification of share ownership rules.

    Closer collaboration with the regulator will speed up the process, Remy Briand, MSCI’s global head of research, said on a conference call. There will be at least 12 months between any announcement of A shares’ index inclusion and the implementation, Briand said.

    “Short term, it’s a disappointment for some of us who would like to see them start the process sooner,” said Brendan Ahern, the chief investment officer at Krane Fund Advisors.

    “But the trajectory is there. It’s telling asset managers, ‘You have to figure this out — this change is coming.’ I don’t believe the three issues they raised are insurmountable. They won’t wait until the 2016 review to include A shares. It will happen sooner,” said Ahern.

    China has addressed some of the biggest concerns that emerged from MSCI’s review last year over market access. One is taxes, with authorities saying in November that purchases through the exchange link will get a “temporary” waiver on capital gains levies. Policymakers have also eased controls on using multiple brokers and started a trial to allow same-day trading on some securities.

    China, through firms listed in Hong Kong, accounts for more than 25 percent of the emerging market benchmark. It’s the biggest weighting in the gauge, followed by South Korea’s 15 percent. (SD-Agencies)