Exclusive: MSCI says volatility won't impact China 'A shares' decision

By Jessica Toonkel

NEW YORK (Reuters) - U.S. index provider MSCI Inc (NYSE: MSCI) said on Tuesday that recent market gyrations in China and a barrage of interventions by the authorities to stop the rout will not be a factor in deciding whether to include China-listed shares in its Emerging Markets Index.

China has unleashed a volley of measures to try to prop up share prices that have fallen around 40 percent since mid-June, including pushing domestic investors to buy shares, questioning them over trading strategies as well as eliciting public confessions of wrongdoing from brokers, a regulator and a journalist in a probe into market volatility.

But MSCI said it is not allowing any of that to factor into its decision.

Sebastien Lieblich, executive director of MSCI Index Management Research, told Reuters in an interview on Tuesday that by June of next year, when it will make its decision on whether or not to include China, the current turmoil could all be "a bad dream."

In June, just before the selloff began, MSCI announced it would delay adding China-listed 'A shares' to its closely-tracked MSCI Emerging Markets Index, but said it expected those shares to be incorporated once outstanding issues relating to the accessibility of China's markets were resolved.

That remains the case, Lieblich said.

"The volatility we have witnessed in the market and the recent events have absolutely no bearing on our decision," he said. "The (Chinese) market is just going through a correction; structurally speaking nothing has changed."

Lieblich said the only thing that could change MSCI's plans was if regulators in China passed measures to make its market less accessible to foreign investors, a move that he does not expect.

But there are doubts that Beijing will open up China's markets further to overseas investors anytime soon.

"I don't think China is going to be able to open up the market enough between now and June to give MSCI the reason to move forward because they are dealing with a lot of other issues right now," said Todd Rosenbluth, head of exchange traded fund and mutual fund research at S&P Capital IQ.

"The Chinese government's focus is on stabilizing its economy, not on making its global market more institutional friendly," he said.

A decision to include domestic Chinese stocks in MSCI's key Emerging Markets Index would have injected $400 billion of funds from asset managers, pension funds and insurers into mainland China's equity markets over time, the index compiler has estimated.

MSCI has also been in discussions with regulators in China and they understood MSCI's position, Lieblich said.

MSCI's clients, mostly big passive funds such as like BlackRock Inc (NYSE: BLK), were in favor of the addition of China listed-shares if the market accessibility issues it has outlined were addressed.

BlackRock's $21 billion iShares MSCI Emerging Markets Index ETF (NYSE: EEM) tracks the MSCI Emerging Markets Index.

"In our discussions with clients about the current situation in China, clients make this difference between what is structural and what is happening at this precise moment," Lieblich said.

In fact, BlackRock believes that the index provider will ultimately have to add the market given its size and importance to the emerging markets space, despite recent events, said Jeff Shen, head of BlackRock's emerging markets.

"You cannot exclude the largest emerging market in the world from the emerging markets index," Shen said.

(Reporting by Jessica Toonkel, writing by Lisa Jucca in Hong Kong; editing by Alex Richardson and G Crosse)

You May Also Be Interested In

• Deutsche Bank Upgrades MSCI Inc. (MSCI) to Buy, 'Compelling entry point for long-term investors'
• Colombia arrest warrants suspended for nine Segunda Marquetalia leaders
• Global economy set to stay on a roll for the rest of the year - Reuters poll