iShares chief scorns global listing plan for Chinese equities; “Not until you have capital account liberalisation does it make any sense for our clients”

April 13, 2014 5:08 pm

iShares chief scorns global listing plan for Chinese equities

By Josh Noble in Hong Kong

The head of iShares – the world’s top provider of exchange traded funds – has poured cold water on plans from MSCI and FTSE to include mainland Chinese equities on their global indices, which are tracked by trillions of dollars of assets.

Mark Wiedman, iShares global chief and a member of BlackRock’s executive committee, told the Financial Times that without a significant opening of China’s capital account, adding Shanghai-listed shares – known as A shares – to widely followed indices would be effectively unworkable.

“The index has to be executable for it to be effective for clients, and that is the big issue when people talk about A-share inclusion. Not until you have capital account liberalisation does it make any sense for our clients,” said Mr Wiedman. “A-share inclusion feels like [it is] not on the very near-term horizon.”

MSCI last month launched a consultation with investors over its plans to include a small slice of mainland-listed shares in both its China index and its emerging markets index, which is tracked by funds worth about $1.5tn.

At the time, MSCI highlighted “very significant developments” as Chinese regulators took steps to improve international access to domestic markets.

However, Chinese equities remain largely off-limits to global investors, who can access them only through a quota system managed by mainland regulators.

Although the total amount of foreign investment permitted under existing rules is more than $200bn, just $83bn worth of licences have been granted to date.

Even so, New York-based MSCI hopes to begin A-share inclusion from May next year, although it has yet to make a final decision on whether to proceed. FTSE Group, MSCI’s British rival, also wants to add domestic Chinese shares to its global indices.

Mr Wiedman is not the first to express doubts about China’s potential addition to global indices. Mark Mobius, chairman of Templeton Emerging Markets, has described the MSCI plan as a “very bad idea”.

Mr Wiedman’s comments follow an initiative to provide mutual market connectivity the Hong Kong and Shanghai stock exchanges, which has the potential to dramatically open up mainland markets.

Chinese and Hong Kong regulators last week revealed plans to allow investors on both exchanges access to hundreds of stocks in each other’s markets, effectively adding a new, simpler route into mainland China for global investors. iShares’ flagship Asian product is an exchange-traded fund tracking China’s A50 index, which includes both direct exposure to Chinese assets and synthetic exposure through derivatives.

At more than $8.5bn, the A50 ETF – known locally simply by the stock code “2823” – is the largest in Asia, and one of the most traded securities on the Hong Kong exchange.

Mr Wiedman said that mutual market connectivity was unlikely to pose a serious threat to the A50 ETF’s success as it would still offer “simplicity and liquidity” for investors seeking China exposure, and that there were many unanswered questions about how the exchange link would work.

Regulators hope to have the Hong Kong-Shanghai connection up and running in six months’ time.