PBOC chief slams protectionism ahead of MSCI A-shares decision

  • PBOC governor Zhou criticized protectionism at a forum in Shanghai
  • Zhou's comments come ahead of an expected MSCI decision on mainland shares' inclusion into its benchmark emerging market index
  • Analysts say despite Chinese government's verbal commitments to opening up the market, challenges remain

In a show of commitment to a more open market, China's central bank governor on Tuesday criticized protectionism in the country's financial sector just hours ahead of MSCI's decision on whether to include Chinese mainland shares to its benchmark emerging markets index.

"From the experience of many countries, including our own, protections will lead to laziness and weakness... protectionism will lead to weak competitiveness and will hurt the industry's development, and (make for) unhealthy and unstable markets and institutions," People's Bank of China Governor Zhou Xiaochuan said at an annual forum in Shanghai, Reuters reported.

Such talk out of China is set to be well received by foreign firms hoping for a greater chance at that growing market.

"The central bank governor was certainly saying all the right things there. That's what market participants want to hear, that China is opening up, that capital controls are easing and that it's an easier place to do business," said Sat Duhra, portfolio manager at Janus Henderson Investors.

Yet while Zhou's comments may indicate the Chinese government's commitment to financial sector liberalization, foreign companies still face a range of restrictions on investment and business in China.

Progress has been made since the last MSCI review, but there are still obstacles, Duhra told CNBC's "Capital Connection." Other analysts with whom CNBC spoke also cited the suspension of a number of shares, restrictions on capital flows and curbs on trading as limitations.

Coming ahead of the MSCI decision — the fourth time mainland China shares are being considered for the index — the timing of Zhou's comment was also "convenient and perhaps poignant," said Vishnu Varathan, senior economist at Mizuho Bank.

It may also be an acknowledgement of the issues that still loom over the Chinese financial sector.

"His broader point may be that investors ought to take the longer view insofar that MSCI inclusion is a matter of time and whether it happens today or not is simply a detail. Also, embedded in the statement is that fact that governance issues will be forced to the fore as financial markets (in China) internationalize. And this, over time, will strengthen the financial sector — 'baptism of fire' not excluded entirely, of course," added Varathan.

Analysts are divided over whether it will be a lucky fourth try for China mainland stocks, but what is clear is that their inclusion would present opportunities and access for international investors who want to trade those stocks.

"The implications, particularly in (an) environment where global investors are still trying to find yields in emerging markets, are vast," said Douglas Morton of Northern Trust Capital Markets. He added there was good value in Chinese banks and insurers — some of the "cheapest" in the world now.

The stock index giant plans to announce around 4:30 p.m. ET Tuesday whether mainland stocks will become part of the MSCI Emerging Markets Index.