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Inclusion of Chinese Shares in MSCI Emerging Market Index Leaves Retail Investors Unmoved

Last month, U.S. index provider MSCI Inc. announced it would add domestic Chinese equities to its global emerging markets benchmark index. By some estimate, MSCI’s decision to add the “A” shares to its Emerging Markets Index could move as much as $400 billion of funds from asset managers, pension funds and insurers to mainland China’s equity markets over the next decade. The company had declined to add the shares for three years leading up to the decision. The index company said it will add 222 China “A” Large Cap stocks on a gradual basis beginning next year.

The 222 stocks MSCI is planning to add to the emerging markets index include financial firms such as Bank of China, China Merchants Bank, Guotai Junan and Ping An Insurance, according to MSCI. Other names include Tsingtao Brewery, SAIC Motor, Suning Commerce and Spring Airlines.

AAII Weekly Survey Question

As to how this change impacts investors’ views of the MSCI Emerging Market Index, we asked our readers this question:

Does the decision by MSCI to include the shares of Chinese companies in its emerging market benchmark make you more or less likely to invest in a fund that tracks the index?

Here are the results:

In all, 1,310 readers responded to our weekly survey.

Nearly half of the survey participants (46%) said that the addition of Chinese “A” shares in the MSCI Emerging Market Index doesn’t change their opinion of the index or whether or not they would be more or less likely to invest in a fund that tracks the index.

Almost one-quarter (24%) said that they are now less likely to invest in a fund that tracks the Emerging Market Index with the addition of Chinese shares.

Only 19% of respondents said they are more likely to invest in an index that tracks the Emerging Market Index once Chinese shares have been added.

The remaining 11% said they are not sure how the addition of Chinese shares will impact their likelihood of investing in the index.

Weekly Special Question

Depending on the news source, investing in China either represents great opportunities or great risk (or both). When selecting a trustee, there are several major attributes to consider. Certain attributes—integrity, for instance—are always extremely important; the importance of certain other attributes will depend on individual circumstances.

According to Morningstar, China had $21 trillion saved in cash as of May 2016, while the U.S. had $11 trillion in savings as a country. Since it is very difficult to invest outside the local market, this tremendous amount of cash bodes well for demand.

However, there are worries about China’s slowing growth as its government tries to reduce the economy’s dependence on government spending. The government stimulus has led the government to create more debt. Since the global financial crisis in 2008, total debt of China has quadrupled to 250% of GDP, according to NN Investment Partners. Credit to the corporate sector is the main driver of China’s rising debt and this level is well above the level of its emerging market peers and exceeding even developed economies.

Finally, government intervention is a major concern for those investing in China. The government’s botched attempt to support its stock market in August 2015 led many to question China’s commitment to free markets.

To understand what our readers see as the biggest risks and opportunities to investing in China, our latest weekly special question asked:

What do you believe are the biggest benefits and risks of investing in Chinese companies?

In all, 141 readers responded to this question.

Breaking down the responses, by nearly a two-to-one margin our readers feel there are more risks to investing in Chinese companies than benefits.

Among the risks cited by participants, too much government control and questionable/fraudulent financial data were the two biggest risks to investing in China. Following close behind was the lack of transparency and a lack of credibility.

Other themes that came out of the responses regarding the risks of investing in China include:

  • Currency manipulation
  • Market and political risk
  • Military conflict

Looking at the benefits of investing in China, its growing economy was cited the most by our readers. Having access to such a large market and group of consumers was the other most-widely cited opportunity for investing in China.

Here is a sampling of the responses:

  • “Benefit it is a huge market second only to the USA.”
  • “The biggest benefit is the long-term growth.”
  • “China is a rapidly growing economy, not much unrest, people seem optimistic.”
  • “I do not trust Chinese companies to not cook the books.”
  • “Backroom evaluation and lack of transparency.”
  • “Can you trust their accounting? Will the government protect private property rights?”
  • “Biggest risk is that the government is a loose cannon in the way that it insists on controlling the markets.”

Everybody has an opinion! Why not give us yours? Participate in our weekly member poll, updated every Monday, and see the results online at http://www.aaii.com/memberquestion.

 

One thought on “Inclusion of Chinese Shares in MSCI Emerging Market Index Leaves Retail Investors Unmoved”

  1. China does not have a reliable economic system, unbiased political nor cultural tradition that sets and abides to ethical standards that would we in the Western
    hemisphere rely-on when choosing entities for investments!

     

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