MSCI to Remove Swath of China Stocks From Indexes as Markets Sink

(Bloomberg) — MSCI Inc. is cutting dozens of Chinese companies from its global benchmarks following a market rout that’s erased trillions of dollars in value from the nation’s stocks.

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The index provider is removing 66 companies from its MSCI China Index in its latest quarterly review, the highest tally in at least two years. The changes, effective as of the close on Feb. 29, also apply to the MSCI All Country World Index. Stocks to be cut include property developers Gemdale Corp. and Greentown China Holdings Ltd., as well as China Southern Airlines Co. and Ping An Healthcare and Technology Co.

The removals add to risks for China’s already beaten-down market as index-hugging funds will have to purge these stocks from their portfolios. There’s at least $5.9 billion in exchange-traded funds tracking the MSCI China Index, the largest of which is the US-listed iShares MSCI China ETF, according to data compiled by Bloomberg.

China’s weighting in global portfolios has been slumping amid worries about its struggling property sector and weak consumption, and as alternatives such as India become more prominent. In a sign of the deep pessimism about the China and Hong Kong stock markets, equity rallies spurred by a slew of policy support measures last week faded within a few sessions ahead of the Lunar New Year holidays.

“It highlights the issue of negative flows for Chinese stocks as investors reduce exposure to the country, in large part due to recent weak fundamentals, but also fears of ongoing financial instability, regulatory uncertainty, and — most of all — country risk,” said Kyle Rodda, senior market analyst at Capital.Com Inc.

“Some investors may also be forced to liquidate because of losses already incurred or because certain companies no longer fall within investment mandates,” he added.

Read more: Wall Street Pivots to India as It Searches for China Alternative

Three stocks will be deleted from the Hong Kong index as well: Budweiser Brewing Co. APAC Ltd., New World Development Co. and Xinyi Glass Holdings Ltd.

The changes weren’t all about cuts, though. Five companies will be added to the MSCI China Index, including electrical-appliance maker Midea Group Co. and skin-treatment company Giant Biogene Holding Co.

Overall, a total of 24 companies will be added to MSCI’s all-country measure while 101 will be deleted from it. For its India benchmark, the index provider will add five stocks while excluding none. MSCI takes a number of factors into account for including stocks in its standard indexes such as market capitalization, free float and extreme price increases.

Read more: MSCI Says 24 Additions to, 101 Deletions From ACWI Index

As Hong Kong-listed Chinese stocks resume trading on Wednesday, the higher number of deletions could weigh on investor sentiment. Onshore markets will reopen on Feb. 19.

“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 the world’s second-largest economy,” said Hebe Chen, market analyst at IG Markets Ltd.

(Adds details on changes to the MSCI All Country World Index in the ninth paragraph.)

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