MSCI can't wait until Chinese markets are perfect for EM index inclusion, says CSRC

A senior official from China's securities regulator said on Sunday that MSCI shouldn't wait too long before adding Chinese shares to its index, due to the importance of the China market.

Qi Bin, the head of international cooperation at the China Securities Regulatory Commission (CSRC), made the remarks as the U.S. index publisher prepared to decide on June 14 whether to include mainland-listed "A" shares in its emerging market index.

"A global stock index without (Chinese) A shares is incomplete," Qi told a financial conference in Shanghai. "We take a very open attitude to MSCI's decision. But including A shares is inevitable. You can't wait for the market to be perfect...You can't wait too long."

Last year, MSCI postponed including Chinese shares in its index, partly due to concerns over accessibility for foreigners, liquidity and the maturity of the China market.

Qi said regulators have already taken a series of steps to address investor concerns, such as making the market more accessible to overseas investors, and publishing rules to regulate share suspensions by listed companies.

A decision to allow yuan-denominated shares - or A shares - into its widely used Emerging Markets Index, could draw $400 billion into Chinese shares in the next decade, MSCI estimates show.

Still, while China has met some key requirements of the MSCI, other concerns remain unaddressed, investors and people familiar with the discussions said, making the widely anticipated decision far from certain.

The MSCI told China last June that it needed to increase access to its equity markets and fix other rules to win foreign investor backing for inclusion in the benchmark, tracked by $1.5 trillion in assets globally.

Scepticism China could satisfy the requirements deepened owing to unprecedented intervention by authorities during last summer's stock market crash. As shares slumped more than 40 percent in a few months, more than half of Chinese companies suspended their stocks to avoid the slide.

Over the past four months though, the CSRC has stepped-up its efforts to woo global benchmark providers under a new reform-focused senior management team led by Chairman Liu Shiyu, investors and people familiar with the discussions said.

"The CSRC had previously been pretty slow at working out liberalization issues," said Ivan Shi, head of research at Shanghai-based investment consultancy Z-Ben Advisors. "Everyone is more on the same page regarding market opening and the CSRC has responded to many of MSCI's requirements."

Last June, the MSCI and the CSRC said they would create a working group to address MSCI's concerns. Neither party has provided details about the working group.

Discussions were slow to start as the CSRC dealt with the market crash, said people briefed on the matter. Key CSRC managers also left, making it difficult to schedule meetings, and a CSRC roadshow to woo U.S. and European investors was postponed, they said.

But they picked up gear from February, said people briefed on the matter. One source said Shiyu attended some of the meetings. MSCI also fielded top executives and its global chief executive, Henry Fernandez, visited regulators in Beijing in April, three people briefed on the matter said.

MSCI declined to comment.

While many foreign investors harbor worries over inclusion, investment banks are more bullish. Goldman Sachs, for example, said in May there was a 70 percent chance MSCI would add the shares to its major index, citing the steps taken by China to remove investment obstacles.

Still, China has yet to address another MSCI concern, which is to remove rules that require foreigners get permission from the Shanghai and Shenzhen exchanges to launch A share hedging products.

Nor does the CSRC have the power to address all of MSCI's concerns. The PBOC and the State Administration of Foreign Exchange control the size of investment quotas and have played a central role in liberalizing the country's $81 billion Qualified Foreign Institutional Investor (QFII) scheme and its yuan equivalent, RQFII.

Neither the PBOC nor SAFE were immediately available to comment on Friday, a public holiday in China.

Under the QFII scheme, China has yet to lift a 20 percent net monthly cap on capital repatriation, one of MSCI's last remaining concerns. A Hong Kong-Shenzhen stock connect system has yet to be announced, a route that would allow two-way trade and which foreign investors expect to dramatically open up the market.

"The problem is that there is not just one regulator involved," said one person with direct knowledge of the discussions. "But I am convinced they are trying to meet our requirements."

- CNBC contributed to this report.