Chinese stocks are facing increased scrutiny and caution from global investors due to market and geopolitical risks. This has resulted in the removal of almost 200 Chinese stocks from indexes this year. MSCI Inc., a leading U.S. index provider, announced that it will eliminate an additional 60 Chinese stocks from its indexes in its latest quarterly review. This follows the removal of 66 stocks in February and 56 stocks in May.
In contrast, seven Indian stocks have been added to the MSCI Global Standard indexes, narrowing the gap between investments in the two countries. The two Chinese stocks that will be added to the indexes are state-owned hydropower firm Huaneng Lancang and circuit board manufacturer Victory Giant. On the other hand, stocks of 60 Chinese companies and one from Hong Kong will be removed from the indexes. These include state-backed firms such as CSSC Science & Technology Co. Ltd., AVIC Industry-finance Holdings, People.cn, and China Film Group Corporation.
The changes to the MSCI indexes will also impact the MSCI All Country World Index and the MSCI Emerging-Markets Index. Additionally, the MSCI China-A onshore index and the MSCI China all shares index will see the removal of slightly larger lists of stocks. While China experiences a significant reduction in its presence in the MSCI indexes, India benefits by having seven stocks added and one removed. This narrows the gap between the two countries in terms of index weight.
According to Abhilash Pagaria, head of Nuvama Alternative and Quantitative Research, China’s weight on the MSCI index will decrease from 24.8 percent to 24.2 percent, while India’s weight will increase to 19.8 percent from 19.2 percent. This shift reflects investors’ increasing caution towards China and the growing appeal of Indian stocks.
The decrease in interest in Chinese stocks is further highlighted by the record loss in foreign investment during the second quarter of this year. China’s State Administration of Foreign Exchange reported that foreign investors withdrew a record $14.8 billion from the Chinese economy. This marks the second consecutive quarter where more money was pulled out of China than was invested. The net figure first turned negative in the third quarter of 2023 and has not recovered since.
The decline in foreign investment in China is a significant shift from previous years. In 2022, China’s net foreign direct investments reached a peak of $107.2 billion. However, in 2023, this figure dropped to $42.7 billion, the lowest since 2000. The outflow of foreign direct investment in 2024 is expected to continue, potentially resulting in the first net outflow of foreign direct investments in a year on record.
These developments reflect the growing concerns among investors regarding the risks associated with investing in China’s market. MSCI has acknowledged these concerns, stating that geopolitical risks and market conditions have made investors more cautious. It remains to be seen how these trends will continue in the second half of the year and what impact they will have on China’s economy and global investment flows.
