Wu Jiaqing, Chairman Of MSCI Greater China Operation Decision Making Committee: Benchmarking International Standards Is Crucial For The Development Of China'S Capital Market

Thirty years ago, marked by the establishment of Shanghai and Shenzhen stock exchanges, China's capital market has entered a green and astringent pace, and also marks the beginning of an epoch-making new chapter in China's reform and opening-up process. In the past 30 years, innovation and rectification have been intertwined, but we have always adhered to the development direction of marketization and legalization, which is still the main keynote of the development of capital market and even the whole financial market.

In recent years, "new regulations on asset management" was issued, the opening of financial market to the outside world was accelerated, and major systems such as science and technology innovation board and registration system came out. The process of marketization, legalization and internationalization of the whole capital market and financial market has been accelerated. China's A-shares successfully broke through MSCI for the fourth time in 2017, and further expanded in 2019, with a weight of 20%, which is also an important sign in this process.

What are the changes in the attitude of foreign institutions to the Chinese market under the major measures of China's capital market and financial market? What are the differences between China's capital market and the world's mature market? What are the suggestions for strengthening the market construction and connecting with the international market?

With these questions in mind, 21st century economic reporter recently interviewed Wu Jiaqing, chairman of MSCI's Greater China operation decision-making committee. She deeply shared these issues from the standpoint of large international intermediaries and overseas investors.

The new regulations on asset management are very important for foreign institutions

What are the key points of China's capital market in the 21st century?

Wu Jiaqing: I think there are several milestone events that have greatly promoted the opening up. First, the introduction of QFII mechanism solves the specific problems of foreign capital entering the Chinese market and brings a breakthrough for foreign capital to enter the Chinese market.

The second is interconnection. Interconnection has developed rapidly in recent years. One of the important reasons is that MSCI has incorporated A-share into its flagship index. We are a global index company. After a share is included, it will automatically enter the allocation of foreign capital.

There is also a very important policy. Last year, the regulation released the restrictions on the shareholding ratio of foreign capital on asset management institutions, allowing 100% shareholding. This is very important. For many years, many foreign investors have entered the Chinese market in the form of joint ventures, and their development speed has been limited.

In addition, the new regulations on asset management introduced two years ago are slowly being implemented, which is very important for foreign-funded institutions. You can see that asset management is changing from the original capital preservation and cash exchange mode to the market-oriented direction. Although the policy was introduced two years ago, we were observing how the specific implementation would be. In the past two years, we have seen that the new regulations are indeed being implemented, which is for foreign investors It's exciting.

21st century: the introduction of the new regulations on asset management is indeed a major adjustment for the whole market. Is overseas optimistic about the development of China's market in recent years after the new regulations?

Wu Jiaqing: Yes. At that time, we all knew that this was a huge change. However, considering that China's social stability and openness were always in balance, after all, the scale off the balance sheet was so large that we were observing it slowly. In the past two years, from the landing of financial management subsidiaries to the establishment of joint venture financing subsidiaries, including the current investment in the capital market, of course, at present, many of them are through outsourcing cooperation. In the future, we will certainly establish an internal team to invest by ourselves. This is a process.

In the past two years, overseas institutions have indeed felt the determination and speed of the government. Of course, this has something to do with the environment of the capital market.

21st century: you have talked a lot about the positive aspects of the Chinese market. Now, what do you think is the main gap between the development of China's market and the mature market?

Wu Jiaqing: first of all, China's current economic scale and the total market value of a shares are the second in the world, but the degree of securitization in China's market is far from enough. The value of a stock market accounts for about 60% of the total GDP, and the U.S. stock market accounts for about 166% of the total GDP in the mature market. This difference can be imagined.

Second, the participants of A-share market are mainly retail investors. Overseas markets are mainly institutions. Retail investors and institutions have different concerns. Institutions focus on long-term returns, while retail investors focus on short-term returns and pursue hot spots. The degree of participation of institutional investors is an important criterion to measure whether the market is mature or not.

This is why it is very important for us to include A-share in the MSCI flagship index. MSCI provides investment decision support tools and services for more than 7800 institutions around the world, covering pension, banking, insurance, securities companies, asset management companies, etc. they are interested in emerging markets, but their understanding is limited. In 2019, MSCI will increase the inclusion factor of China's A-shares to 20%. We also hold an open and transparent attitude towards the conditions for further expansion. There are four problems to be solved urgently: improving the availability of foreign institutions for risk hedging and derivatives to meet the demand for risk control; making China's A-share shorter settlement cycle (T + 1 / T + 0) in line with international standards (T + 0 / T + 2); and In Shanghai and Shenzhen Stock connect, we should gradually transfer to the use of comprehensive trading account mechanism, and resolve the holiday risk problem of Shanghai Stock connect and Shenzhen Stock connect under the interconnection mechanism.

As for the difference between the Chinese market and the mature market, we also see that the product richness is very important. For example, although A-share has been included in MSCI, foreign investors still have relatively strict proportion restrictions on A-share companies. The total amount of foreign shares held by a single stock cannot exceed 30%.

21st century: what are the specific problems of product richness?

Wu Jiaqing: since MSCI entered the Chinese market for decades, it has successfully built a package of one-stop investment decision support tools and service ecosystem for hundreds of Chinese local institutions. In addition to the index business, our asset allocation and risk management tools such as Barra and riskmetrics, ESG ratings and private equity / real estate solutions are also popular with investors.

Now, the climate change has become the mainstream of ESG, and it has become a real tool for us to invest in climate change. As a global leader in promoting ESG investment, we are also doing some ESG investor education with Chinese regulators and exchanges.

Since 2014, about $270 billion has been tracked or benchmarked by large asset owners in MSCI ESG stocks and fixed income indices. The number and scale of ETF funds tracking MSCI ESG index are also growing rapidly. As of September 2020, the ETF fund scale tracking MSCI ESG index has increased by 186% compared with last year, reaching more than $70 billion, so the development trend of ESG is obvious.

The speed of policy implementation is important

21st century: China's financial market policies have changed a lot in recent years. Now, what are the main concerns or concerns of foreign institutions?

Wu Jiaqing: at present, the proportion of foreign investment in the whole Chinese market is relatively small, especially in terms of the economic volume, the opening proportion of the surrounding Chinese Taiwan and South Korean markets has been very high. Now the market liberalization is the first step. With the policy in place, we will also consider whether the market has supporting infrastructure.

There are many issues of concern to all of you. The four conditions mentioned above for further opening up are more important. We are also communicating with the regulatory authorities together, and the attitude of all parties is very positive.

The second problem is the confidence of overseas investors in the Chinese market. Now there is confidence. No matter for China's economy or policy, many of the past pain points have been solved at the policy level, and the supporting environment is getting better and better, but there is still room for improvement in the landing speed. For example, it is very important for the foreign-funded institutions to have a clear and detailed policy on the landing of foreign-funded companies, such as whether they have the same detailed policies and policies on the landing of foreign-funded enterprises, such as whether they have the same policies for the implementation of 100% products and whether they hope to be approved by foreign-funded institutions.

The opening speed of China's capital market has made a great breakthrough in the past two years, but at the same time, it should also be benchmarked with the world. Capital is very realistic and will flow rapidly with the changes of the market.

21st century: what suggestions do you have for further strengthening the marketization and internationalization of China's capital market?

Wu Jiaqing: I think benchmarking international standards is very important for the healthy development of China's market. Now many people with insight in China have realized this point and pay attention to risks and rewards from the reality.

The realization of international standards requires the participation of many intermediary agencies, including credit rating, lawyers, auditing, etc. international standards are relatively mature. Benchmarking international standards can improve one's own reputation on the one hand, and improve its international reputation on the other.

Third party services in the capital market should be strengthened. In this respect, the biggest problem in the Chinese market is the data, because the data are scattered and lack of transparency. If we want to benchmark international standards, data is very important, especially the reliability of data sources. At present, many of our data sources are local, and the local methodology may not be internationally recognized. Therefore, the key to unified standards is data and methodology. I am also very happy to see that the rating agencies in the domestic market are also opening to the outside world. It takes a process, but the direction is right.

We have been working with overseas institutions to communicate with regulators and promote some good ideas and suggestions. In terms of form and process, institutions first come out of the scheme and submit it to the regulatory authorities for approval. I think we can change our thinking. For example, the regulatory authorities put forward specific requirements according to the needs, and let the institutions formulate their own plans according to the needs. This may be faster. Many of these institutions are listed companies with more than 100 years of experience in the world and have basic risk control and governance mechanisms.

Is the 21st century's channel of communication open?

Wu Jiaqing: I think it's very smooth. I think the regulation is very open, the determination is very clear, and it is very positive. We can all feel this.