Into a More Open Chinese Market: MSCI’s 2020 Semi-annual Index Review
► MSCI has added 56 Chinese companies into MSCI China All Shares Index and 61 into MSCI China A Onshore Index.
► As China's A-share market gets more open, MSCI has shown its optimism amid the continued pandemic.
Deemed as the compass for many international investors, MSCI often reflects the updates of global markets and has a good nose for landscape shifts in dynamic economies.
In the most updated semi-annual review in 2020, this index provider has made substantial changes in their indexes constitution, compared to the last quarterly adjustments. This time, 137 securities will be newly added to and 181 securities deleted from MSCI SCWI Index, including Offcn Education (002607:SZ) and China Feihe (6186:HKSE) as the largest-market value additions in the MSCI Emerging Markets Index.
Contrarily, MSCI February Quarterly Review only saw seven companies added into its Global Standard Indexes, including six Chinese companies: three A-share listed, one red-chip stock and two Chinese ADRs.
MSCI ACWI Index, considered as one flagship global equity index, started to capture Chinese A-shares since 2018 and has given more weights to Chinese shares (China All Shares including A-shares, B-share, H-shares, P-shares), reaching up to 5% as of November 2019.
The MSCI series index rebalancing typically takes place quarterly or semi-annually in a review relative to the market or the determined strategies, with prime objectives of representativeness, replicability and efficiency.
This semi-annual review amid the continued pandemic seems to be attracting the attention of global investors even more than in usual times. The COVID-19 'black swan' event has disrupted the global market, leaving a tough situation for institutional investors. This result seems to be a robust reference after the world experienced the pains from the turbulence.
Another highlight is the set of China companies listed overseas, especially on the US stock market. Within two months after MSCI’s inclusion of Luckin Coffee (LK:NASDAQ) in its first quarterly review, it shocked the global market with a sensational fraud. This scandal has even caused a rippling effect on other US-listed Chinese companies, regardless of industries. GSX Tech Edu (GSX:NYSE) saw its share price dwindling after being accused of revenue fraud – even though its Q1 financial report shows a 336% increase in net profits.
However, the two well-known Chinese US listings will have their different comings. Luckin Coffee will be deleted from MSCI China All Shares Index, while GSX Edu will be added into this glory list.
A focus on Chinese shares
In an exclusive look at Chinese companies, MSCI has established many relevant indexes to track the performances of Chinese shares. Their actual businesses, together with the mainland market, can be reflected by the following indexes.
MSCI China All Shares Index: it captures large and mid-cap representation across China A‐shares, B‐shares, H‐shares, Red‐ chips, P‐chips and foreign listings (e.g., ADRs), namely Chinese shares listed in Hong Kong, Shanghai, Shenzhen and outside of China.
MSCI China A International Index: it includes the China A-share constituents of the MSCI China All Shares Index, a subset of MSCI China All Shares Index from an international QFII/RQFII investor’s perspective.
MSCI China A Onshore Index: it reflects large and mid-cap representation across China securities listed on the Shanghai and Shenzhen stock exchanges, which additionally covers B-shares in contrast with China A International Index.
The Chinese A-share market has come under the spotlight since the first inclusion into MSCI’s star index – ACWI index and Emerging Market Index in 2018. In the volatile move of May 2020 Semi-Annual Review, 45 out of 56 are Chinese A-shares.
“China A-shares equities suffered a sharp drawdown in March as global equities plunged into a bear market amid surging COVID- 19 cases worldwide and slumping oil prices,” as noted in the Morgan Stanley’s China A-shares Fund monthly commentary on March 2020. “The MSCI China A-shares Onshore Index declined -8.22% but outperformed the MSCI All Country Asia ex-Japan Index and MSCI Emerging Markets Index, which returned -12.05% and -15.40%, respectively.”
The Star Market, Chinese Nasdaq-like stock exchange, also attracts the attention of the index provider who bids the long-term future of rising Chinese sciences and technology. Even though the MSCI index considered Chinese Star Market as the index candidate pool, it did not take further actions immediately until the February Quarterly Review this year when it added the very first Star Market-listed company, Beijing-based Kingsoft Office (688111:SH), into MSCI China All Shares Index and China A-shares Index.
It hasn't yet made it into the Global Standard Indexes - it takes time for internationally recognizable index providers to fully realize the value of the Star Market.
The world-class financial research juggernaut has always been showing its interest in the fastest-growing emerging markets. As early as in 2015, MSCI started to incorporate two Chinese foreign listings into its MSCI China and MSCI China All Shares: Alibaba (BABA:NYSE) and Baidu (BIDU:NASDAQ). Later in October 2019, MSCI showed its intention to include the Star Market-listed stocks into its two indices, the MSCI China and MSCI China All Shares, as reported.
Indeed, the Chinese public market has been growing into an ignorable economic force during the last decade. As informative as MSCI, it has tracked three major sectors based on the Global Industry Classification Standard (GICS®) and formulated three indexes respectively, selecting constituents from China All Shares portfolio against a policy of 10/40 concentration constraints.
In a comparative look into these three indexes, Consumer Staples sector has outperformed the other two sectors since the beginning of 2019 in a continued up-swinging trend, diverging from others. Even Consumer Discretionary, with the lowest net return by far, beat MSCI All China Shares by 11.31 points higher, according to the MSCI factsheet (as of April 2020). For the annual performance, the MSCI China All Share Consumer Discretionary 10/40 had 43.34% annualized net return in 2019, 56.85% higher than the China All Share Index.
A noteworthy remark about the healthcare Index shown above is the idiosyncratic slump in 2020 early Spring which dragged it down to a recent bottom below 1250. It later caught up very aggressively and kept narrowing the gap between the leading one. This quarter-long sprint indicates a boom in China’s healthcare industry, represented by several impressive investments deals and wide-sprawling new healthcare businesses – such as online healthcare.
Apart from these Chinese shares-specific MSCI indexes, their corresponding Exchange-Traded Funds (ETFs) are even more dynamic and favorable to some long-term investors. See more about China Shares-focused Indexes and their US-listed ETFs in an EqualOcean in-depth article published this week.
Currently, the world is still shrouded by the hovering COVID-19 pandemic. The reality that many cross-border businesses being trapped in stagnant, international companies struggling with cutoff operations and markets set into slumps - has once again reminded the world that every economy is tightly interlinked in a global community of shared future.
Last but not least, the mainland China market has made a more fundamental reform towards openness. Last week, the People’s Bank of China (PBoC) and the State Administration of Foreign Exchange (SAFE) canceled the investment quota restrictions for ‘Qualified Foreign Institutional Investors’ (QFII) and ‘Renminbi Qualified Foreign Institutional Investors’ (RQFII).
The government has realized the inappropriate disparity of investment fund constitution in China A-share market, with just 2% total market value represented by foreign investment accounts. As Fang Xinghai, the vice-chairman of the China Securities Regulatory Commission (CSRC), said, “we need to open it up further.”