Emerging market status: China urged to follow Pakistan’s example

An article published in Financial Times has recently talked about why the MSCI just gave the emerging market status to Pakistan while it has denied the same for China for many years.

The article points out that China has to be more liberal even if investors and companies want to take capital out of country.

The article quotes Citi as saying:

1) Capital Mobility: “QFII investors cannot repatriate on a monthly basis more than 20% of their prior-year net asset value. This limit poses a potential liquidity concern for investors, and thus must be removed or substantially increased with a shorter repatriation horizon”

2) Suspensions: “A period of observation is needed to assess its effectiveness and determine that the number of suspended stocks has been significantly reduced.”

3) Pre-approval: “Investors expressed concern over potential uncertainties regarding the broad pre-approval restrictions … on launching financial products by any financial institution on any stock exchange internationally if these products are linked to indexes that include China A shares. These restrictions apply to any new financial products as well as to any existing products. The breadth of the restrictions is unique in Emerging Markets…. Consequently, A vast majority of investors said that alignment to international norms and satisfactory resolution of this issue is essential if they are to include A shares in their investment opportunity set.”

The article goes on to point out that Pakistan which took a disastrous decision of fixing a stock market floor in 2008 had finally come around the realisation that going against the market forces is not a good idea.

The article quotes Credit Suisse as saying that the Pakistani market has “undertaken key reforms to satisfy the requirements for an upgrade to the EM Index”.

Talking about Pakistan paving way for the controversial Chinese moves, the article quoted Dawn newspaper which reviewed events in 2008: “In that fateful year, the Karachi stock market index of 100 shares had galloped to touch its all-time high level of 15,760 points on April 20, 2008. And then the stock prices collapsed with index plunging by some 6,600 points or 40% in four months. As panic was thick in the air, an entirely insane act was performed. On August 20, 2008, a “floor” was fixed at the level of 9144 points below which the index was not allowed to fall. All investors, including foreigners who wanted to seek an exit were trapped.”

“Simon Cox of Emerging Markets Stock Fund (Hong Kong) says: “I have gone through the record of stock exchanges and never since the oldest stock exchange in the world at Amsterdam was established in 1602, I could locate one example where a stock exchange had ever blocked the exit in violation of basic principles of free market mechanism. Every Dick and Harry who had anything to do with the Pakistan capital market—the regulators, brokers and traders – now fall over each other in condemning the ‘floor’ as an unforgivable blunder. It turned the catastrophe into calamity. The ‘floor’ remained in place for as many as 108 days. When it was finally lifted on December 14, the market, as was feared, came crashing down to the level of 4,782 points in fewer than fifteen sessions (another 52% decline in addition to the previous 40% decline).”

China made a similar move following Pakistan and a headline in Bloomberg read: China Bans Stock Sales by Major Shareholders for Six Months.

The article argued that with Pakistan coming back from the cold, China had the same route especially as the MSCI has said that based on existing and continuing reform, it would review China A-shares again next year, but did not rule out a potential inclusion before then if changes are introduced.