China is likely feeling slighted as Pakistan gains entry into one of the world's most popular emerging markets equity indices while mainland shares were left out. But Beijing could take a few pointers from the South Asian country.
On Tuesday, U.S. analytics firm MSCI announced it was postponing the inclusion of mainland A-shares into its Emerging Markets (EM) Index as Beijing continues to facilitate market accessibility for global investors, marking the second such delay. With about $1.5 trillion in assets under management tracking the EM Index, China is keen to tap those funds as foreign investors search for returns outside their home markets.
Not only is the news a blow to President Xi Jinping's administration amid the nation's attempts to make China a respected player on the international financial stage, MSCI's decision to upgrade Pakistan—a country more known for its history of political strife rather than financial returns—to EM status likely further rubbed salt into China's wound.
Without A-shares, the Chinese stocks listed in the EM Index are all traded in either Hong Kong or the United States. That means the world's second-largest economy makes up only about one-fourth of the benchmark index; projected full inclusion of A-shares would bring that ratio to more than one third.
"This is the most important part that China should be asking itself: Why is that after 26 years, Pakistan is ahead of us and neutral to view? What is it that China can't do that Pakistan can do?" questioned Frasier Howie, an independent market analyst.
Stability may be the answer.
Pakistan was actually part of the EM Index from 1994 but the Karachi Stock Exchange's temporary closure in 2008 due to a liquidity crunch amid the global financial crisis forced MSCI to drop the country at the end of that year. In 2009, Pakistan was included in MSCI's Frontier Markets Index and the firm warned that the market needed to function without any trading disruptions for some time before being considered for reclassification in its EM Index.
"That's an interesting lesson from Pakistan....You had to have a period of time where investors got comfortable with the idea that they wouldn't close the market again," noted Adrian Mowat, managing director and chief Asian and emerging market equity strategist at J.P. Morgan.