By Alun John

HONG KONG, July 24 (Reuters) – Global index provider MSCI
was wrong in its landmark decision to include mainland
China-listed “A” shares in its emerging markets index in June,
according to nearly half of the international investors surveyed
for a new report into Chinese corporate governance.

MSCI’s decision to add domestic Chinese stocks for
the first time to its benchmark global emerging market indices,
tracked by an estimated $1.9 trillion, was seen as a milestone
in the opening up of China’s markets to international capital.

Yet 48 per cent of foreign investors surveyed by the Asian
Corporate Governance Association (ACGA) said that MSCI was wrong
to include China’s A-shares in its indices, compared to just 27
percent who felt that inclusion was correct.

The survey results were contained in an ACGA report, which
examines what it called “China’s unique system of corporate
governance”.

When MSCI announced that it would add A-shares to the index
MSCI said it had tried “to obtain feedback from the entire
investment ecosystem” which included asset owners, asset
managers, brokers consultants and custodians worldwide.

Governance has long been a hot topic for investors looking
at China, but the MSCI decision put it under an even brighter
spotlight because fund managers who benchmark to its indices
must now invest onshore.

Chinese authorities are working to improve corporate
governance in domestic firms, but their goals can differ from
those of international institutional investors.

The survey reported that 59 percent of investors felt they
did not understand corporate governance in China, including
practices around the roles and responsibilities of non-executive
directors, supervisory boards and Communist Party committees.

In June, China’s securities regulator published new
corporate governance rules, which required listed companies to
do more for “Communist Party building”, including studying the
party’s theories and conducting social activities in line with
party doctrine.

Last year state-owned enterprises amended their company laws
to include the role of Communist Party committees for the first
time. Some companies stated that boards must first consult the
party committee before making decisions.

The ACGA survey suggests that Chinese authorities, who hope
to see more A-shares added to the MSCI benchmark over time, need
to do more to assuage overseas investors’ fears, particularly
when it comes to listed Chinese companies’ governance
structures.

“Corporate governance concerns one of the major
reasons why foreign investors felt that A-shares should not be
added to the MSCI EM index,” said Nana Li, senior research
analyst at ACGA.

Of the investors surveyed by ACGA, whose members have a
combined $30 trillion of assets under management, 68 per cent
described dealing with domestically-listed Chinese companies as
“very difficult”. Only 2 per cent said there was no problem.

Chinese companies – mainly U.S and Hong Kong-listed ones –
currently make up just over 31 percent of MSCI’s Emerging
Markets Index, with A-shares accounting for only 0.8 percent of
the total. If China’s domestic A-shares were to be given their
full weight, China would account for more than 42 percent of the
index.
(Reporting by Alun John; editing by Jennifer Hughes and Eric
Meijer)