Will Chinese Stocks Slide Further After MSCI Cuts Some Chinese Firms from its Index?

Index provider MSCI Inc. is cutting a swath of Chinese companies from its global benchmark indices, which may add to the bearish sentiment regarding Chinese shares.  In its latest quarterly review, MSCI announced that it is removing 66 companies from its MSCI China Index, the most in at least two years.  The changes, effective at the close of trading on February 29, also apply to the MSCI All-Country World Index.

The removal of Chinese companies from the MSCI indices adds to the risk of additional selling of Chinese stocks, as global fund managers tracking those indices will have to purge these stocks from their portfolios.  According to data from Bloomberg, there are at least $5.9 billion in exchange-traded funds (ETFs) tracking the MSCI China Index, the largest of which is the U.S.-listed iShares MSCI China ETF (MCHI).

Due to declining stock market caps stemming from worries about China’s slumping property sector and weak domestic consumption, China’s weighting in global portfolios has been declining.  The move away from Chinese equities has benefited other emerging markets, such as India, which has seen an influx of investors as an alternative to China. For its India benchmark, MSCI will add five Indian stocks to its benchmark while excluding none.

Pessimism towards Chinese stocks has worsened even after a recent slew of government policy support measures failed to bolster confidence.  Capital.Com said, “It highlights the issue of negative flows for Chinese stocks as investors reduce exposure to the country, in large part due to weak fundamentals, but also fears of ongoing financial instability, regulatory uncertainty, and country risk.  Some investors may be forced to liquidate their holdings of Chinese stocks because of losses already incurred or because certain companies no longer fall within investment mandates.” 

Chinese stock markets will reopen on Monday, February 19, after being closed for the week-long Lunar New Year holidays.  Heavy selling of Chinese stocks could reemerge in earnest as the higher number of deletions in the indices weighs on investor sentiment and prompts additional liquidation of Chinese stock holdings.  IG Markets Ltd said, “The deletion list of Chinese companies, spanning across a wide range of sectors from technology, property, and retail to health care, solidifies the perception of systemic-based concerns over China’s economy, the world’s second-largest.”

• Stocks Slump as U.S. CPI Tops Forecasts
• Investing: Why the January Inflation Numbers Don't Matter
• Looking for a Stock to Buy That Defies the Odds? Nextracker Could Be Just the Ticket.
• Can Meta Platforms Become a $3 Trillion Company by 2027?