Morgan Stanley Capital International (MSCI Inc.) announced that it will continue to remove Chinese stocks from its indices, further reducing China’s weight in major emerging market benchmarks.
According to Bloomberg on Tuesday, August 13th, MSCI will remove 60 Chinese stocks in August, following the removal of 56 Chinese stocks in May and 66 Chinese stocks in February, reaching a two-year high in delistings.
These changes will take effect after the market close on August 30th and will apply to all MSCI country global indices. The delisted stocks include China International Airlines, Sany Heavy Equipment International Holdings, and Shanghai Fosun Pharmaceutical Group.
MSCI index provider stated that as of the end of July, China accounted for 22.33% of the emerging market index.
The removal of these stocks will further intensify the downward pressure on the Chinese stock market, as index-tracking funds will be forced to sell these stocks. For example, iShares MSCI China ETF, listed in the United States, has at least $7.9 billion in funds and is part of the MSCI China index.
MSCI’s adjustments indicate a dimming economic outlook for China, with the dominance of Chinese stocks in emerging market investment portfolios possibly being replaced by peers such as India and Taiwan.
Marvin Chen, a strategist at Bloomberg Intelligence in Hong Kong, stated that the removal of these stocks will help promote a “more level playing field for minority investors.” “The previous heavy weighting and influence from China could be more evenly distributed to other markets such as India, South Korea, and Taiwan.”
As the Chinese economy slows down, global funds are gradually withdrawing from China. In contrast, MSCI announced that it will add 7 stocks to its India index.
Reports suggest that the gap between India and China in MSCI’s Emerging Markets Index is expected to narrow in terms of weighting. Analysts from independent investment research institutions like Smartkarma and IIFL Securities Ltd estimate that after the index provider’s adjustments, India’s weight in the MSCI Emerging Markets Index is expected to increase by at least one percentage point. This will place India almost on par with China, with China currently at 22.33% and India at 19.99%.
The increase in India’s weight will position it as a new pillar of the emerging market stock exchange, with the potential for a continuous inflow of funds into the country.