China's weighting in the MSCI Far East ex Japan Free Index will increase twelve fold at the end of Ma...
In aggregate, the Greater China markets will account for 57.5% of the MSCI Far East ex Japan Index.
Following some pressure to revise the current 0.6% weighting, MSCI has decided to include a whole batch of some of the largest stocks in the country, pushing the weighting to 9.58%.
The Far East ex Japan Free Index includes China B shares and H shares, but no Hong Kong-listed 'red chip' stocks. China's low rating was largely because the B and H stocks were underperforming and illiquid.
Now, of the fifty or so red chips, 15 will be listed and around twenty of the struggling B and H shares will be delisted. This will have a substantial effect on portfolio balance. For example, three of the red chips, China Telecom, Legend Holdings and Citic Pacific, make up 85% of the China Free index.
Constance Wong, who manages the Lombard Odier Pacific Rim fund, said: "We have been anticipating this change as China was under-represented in the index. In the beginning of the year we reduced our Hong Kong weighting and increased out China weighting."
Wong thought the reconfigured benchmark would place China at around 6% or 7%. This underestimation should pose no significant problem, however. Irrespective of the indices, regional fund managers have usually found themselves investing in red chips, so MSCI's change should not cause too much of a run on the newly-indexed red chips.
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