China’s MSCI dreams in doubt after Beijing’s shock market intervention

Trust can be destroyed in an instant, while it can take decades to build.

In the wake of the MSCI decision to exclude China’s A shares from its global benchmarks, Beijing’s flurry of market-boosting measures last week have raised further questions about the central government’s commitment to let the market play a decisive role.

Institutional investors have been unanimous in their opposition to the measures by Chinese policy makers to prop up the market since these liquidity injections create a potential moral hazard and could deal a blow to the slow-moving reform of the pivotal financial sector.

“Does the Chinese stock market ever make any sense?” said Ai Mee-gan, an investment manager at Aberdeen asset management which, like many other global investors, accessed the mainland market via the quota system, not through Hong Kong-Shanghai Stock Connect.

“It is seen as a step backwards in financial reform,” the Singapore-based manager said. “Those intervention measures are not an ideal way to stabilise fears of margin calls.”

In theory, a long-planned overhaul of the financial services industry, which is dominated by a handful of large and powerful state-owned lenders, aims to remove entry barriers and liberalise market mechanisms, transferring power away from vested interest groups into the hands of market participants.

Besides lofty valuations of Chinese stocks, the lack of effective stock index derivatives and difficulties in borrowing stocks for short selling activities are seen as a number of key technical issues keeping global investors on the sidelines.