The big news for the week is that MSCI finally caved to Beijing’s incessant pressure – hey, who doesn’t??!! – and let A-shares into its global indices. Now, these indices are used as tracking instruments by vast sums of money in investment funds around the world, and given the nature of the Chinese stocks markets – opacity, auditing standards, shareholder rights, the list goes on – this raises risks for global investors that MSCI has to be aware of. Hence the very limited way in which the A-shares have been included.
The symbolic significance is huge, but the practical impact for now is slight. MSCI and others will be counting on this being a move that will encourage China’s leaders to make reforms that will shift their stock markets – that’s what they are – further in the direction of real. It is the financial market equivalent of the Kissinger appeasement strategy of the past 40 years. Once they are invited inside the tent, they will see the benefits of playing by international rules.
But this is not just diplomacy, it is also money. In this case, we wonder if MSCI faces any potential legal risks as a result of exposing investors to non-market driven factors. If China’s markets do become more market-driven, then of course that risk, if it exists, recedes. If they do not, and the infinite up line should falter, that could create some revenue opportunities for corporate lawyers. The day after the decision – the very day after! – Those in Command sent a message to MSCI reminding them about what China Risk is all about. They changed the rules on video streaming to make control of the space easier for the poor security people who have to wade through the millions of hours of stuff uploaded every day, and ruling Sina’s Weibo platform out of the game. Sina’s share price plummeted, leaving the company down $1 billion market cap. Everybody clear now? Good. Enjoy the weekend!