MSCI Index Drops 66 Chinese Stocks Amid Market Turmoil

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MSCI Index Drops 66 Chinese Stocks Amid Market Turmoil
Image Credits: Yahoo Finance & Bloomberg

The MSCI China Index, a widely used benchmark for global investors, has announced that it will remove 66 Chinese companies from its composition in its latest quarterly review. The decision, which will take effect on Feb. 29, 2024, reflects the dismal performance of China’s stock market, which has been battered by a series of shocks, including the debt crisis of the property sector, the regulatory crackdown on the tech industry, and the weak consumer demand amid the Covid-19 pandemic.

The MSCI China Index, which covers about 85% of the free-float market capitalization of China’s equity market, is tracked by more than $5.9 billion in exchange-traded funds (ETFs), according to Bloomberg data. The index is also a component of the MSCI All Country World Index, a broader gauge of global equities. The deletion of 66 Chinese stocks, the highest number in at least two years, means that index-hugging funds will have to sell these shares and reduce their exposure to China.

The stocks that will be cut from the MSCI China Index span across a wide range of sectors, from technology, property and retail to health care and aviation. Some of the notable names include Gemdale Corp. and Greentown China Holdings Ltd., two of the largest property developers in China; China Southern Airlines Co., the country’s biggest carrier by passenger numbers; and Ping An Healthcare and Technology Co., a leading online health-care platform. These stocks have suffered steep losses in the past year, as China’s economy slowed down and faced multiple headwinds.

The removal of these stocks from the MSCI China Index also reflects the growing divergence between China and other emerging markets, especially India, which has been attracting more foreign capital and outperforming China in terms of economic growth and stock market returns. India’s weight in the MSCI Emerging Markets Index, another popular benchmark for global investors, has risen to 12.5%, while China’s weight has fallen to 32.5%, according to MSCI data.

The MSCI China Index is not the only index that has reduced its exposure to China. FTSE Russell, another major index provider, has also announced that it will delete 25 Chinese stocks from its global equity indexes on Feb. 29, 2024, citing low liquidity and foreign ownership limits. These moves could further dampen the sentiment and confidence of investors in China’s market, which has already lost more than $3 trillion in value since its peak in February 2021.

However, not all Chinese stocks are facing the axe from the MSCI China Index. The index provider has also added five new components to the index, including Midea Group Co., a leading electrical-appliance maker; and Giant Biogene Holding Ltd., a skin-treatment company. These stocks have shown resilience and growth potential amid the challenging environment in China. They could also benefit from the increased attention and inflows from the index funds that track the MSCI China Index.

The MSCI China Index, which was launched in 1996, has been one of the most influential and widely followed benchmarks for global investors who want to gain exposure to China’s equity market. The index has undergone several changes over the years, reflecting the evolution and transformation of China’s economy and market. The latest quarterly review, which will result in the deletion of 66 Chinese stocks, is another milestone that signals the challenges and opportunities that lie ahead for China and its investors.



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