MSCI Adds 69 Chinese Companies to Equity Indexes, Including Companies Targeted by the U.S. Government for Ties to the Chinese Military

Start­ing Novem­ber 30, investors with inter­na­tion­al hold­ings bench­marked against cer­tain MSCI index­es gained expo­sure to sev­er­al addi­tion­al Chi­nese com­pa­nies that have been sanc­tioned or des­ig­nat­ed by the U.S. gov­ern­ment, present­ly or in the past, due to var­i­ous human rights and nation­al secu­ri­ty con­cerns, includ­ing ties to the Chi­nese mil­i­tary.  This comes as a result of a peri­od­ic index review that took place ear­li­er this month by Mor­gan Stan­ley, a lead­ing provider of glob­al indices and bench­mark relat­ed prod­ucts and ser­vices.

On Novem­ber 11, Mor­gan Stan­ley com­plet­ed its semi-annu­al index review for the MSCI Equi­ty Index­es and announced new changes to its index bench­marks to be imple­ment­ed by the end of the month.  In the course of these updates, it was announced that there would be 68 addi­tions and 52 dele­tions from the MSCI Chi­na All Shares Index, which includes Chi­nese com­pa­nies list­ed in Hong Kong (H Shares) and in main­land Chi­na (A Shares).  Many con­stituents of this index are also rep­re­sent­ed in oth­er MSCI index­es, such as the MSCI Emerg­ing Mar­kets and MSCI All Coun­try World Index­es.

The largest addi­tions to the MSCI Chi­na All Shares Index by full com­pa­ny mar­ket cap­i­tal­iza­tion are Hoshine Sil­i­con and CRRC Corp.  Hoshine Sil­i­con and CRRC Corp. are also the two largest addi­tions to the MSCI Emerg­ing Mar­kets Index.

  • Hoshine Sil­i­con Indus­try (Shan­shan) Co., Ltd. is cur­rent­ly sub­ject to U.S. export con­trols and under an import ban after the com­pa­ny was added to the Depart­ment of Commerce’s Enti­ty List and placed under a Cus­toms and Bor­der Pro­tec­tion With­hold Release Order this past June.  Hoshine Sil­i­con has been impli­cat­ed in the Chi­nese government’s per­pet­u­a­tion of human rights vio­la­tions and abus­es in Xin­jiang through the use of forced labor.
  • CRRC Corp. shares tech­nol­o­gy, research, and data with Chi­nese mil­i­tary actors and is involved in China’s mil­i­tary-civ­il fusion pro­gram.  It was iden­ti­fied as a Chi­nese mil­i­tary com­pa­ny by the U.S. Depart­ment of Defense in June 2020 and placed under cap­i­tal mar­kets sanc­tions in Novem­ber 2020 under Exec­u­tive Order 13959.  The com­pa­ny was removed from the DoD list ear­li­er this year. Addi­tion­al­ly, CRRC sub­sidiary KTK Group’s Jiang­su fac­to­ries have alleged­ly used forced labor­ers trans­ferred from deten­tion camps in Xinjiang. 

Oth­er notable inclu­sions in the MSCI Chi­na All Shares Index are Dawn­ing Info Indus­try, North Indus­try Group Red Arrow, and West­one Info Industry. 

  • Dawn­ing Infor­ma­tion Indus­try Co., Ltd. (aka Sug­on) is a high-per­for­mance com­put­ing com­pa­ny cur­rent­ly under U.S. export con­trols.  It has acknowl­edged “a vari­ety of mil­i­tary end uses of its high-per­for­mance com­put­ers” and was added to the BIS Enti­ty List in June 2019 for its involve­ment in China’s mil­i­tary mod­ern­iza­tion efforts.  It was also iden­ti­fied as a Chi­nese mil­i­tary com­pa­ny by the U.S. Depart­ment of Defense and tar­get­ed with cap­i­tal mar­kets sanc­tions by Exec­u­tive Order 13959 in Novem­ber 2020.
  • North Indus­try Group Red Arrow Co., Ltd. is involved in China’s mil­i­tary-civ­il fusion ini­tia­tive and pro­duces artillery shells, rock­ets, mis­siles, spe­cial vehi­cles, and muni­tions.  It is a sub­sidiary of Chi­nese state-owned defense con­glom­er­ate Chi­na North Indus­tries Group Cor­po­ra­tion (Nor­in­co), which was also iden­ti­fied as a Chi­nese mil­i­tary com­pa­ny by the U.S. Depart­ment of Defense and is cur­rent­ly sub­ject to cap­i­tal mar­kets sanc­tions pur­suant to Exec­u­tive Order 14032 issued in June 2021.
  • Cheng­du West­one Infor­ma­tion Indus­try Inc. is a major cyber­se­cu­ri­ty and com­mu­ni­ca­tions encryp­tion sup­pli­er for the PLA.  It has a mil­i­tary indus­try mar­ket­ing divi­sion, oper­ates nation­al first class research insti­tu­tions that lead in the field of nation­al secu­ri­ty, and is involved in key R&D projects with both mil­i­tary and civ­il appli­ca­tions.  West­one is sub­sidiary of lead­ing mil­i­tary elec­tron­ics man­u­fac­tur­er Chi­na Elec­tron­ics Tech­nol­o­gy Group Corp. (CETC), which was also iden­ti­fied as a Chi­nese mil­i­tary com­pa­ny by the U.S. Depart­ment of Defense. CETC is cur­rent­ly under cap­i­tal mar­kets sanc­tions pur­suant to Exec­u­tive Order 14032 issued in June 2021.

CRRC Corp. and Dawn­ing Info are both being re-added to MSCI index­es after hav­ing pre­vi­ous­ly been removed in Jan­u­ary 2021, in com­pli­ance with Exec­u­tive Order 13959, which banned all U.S. invest­ment in a list of Chi­nese mil­i­tary com­pa­nies admin­is­tered by the U.S. Depart­ment of Defense.  The com­pa­nies became eli­gi­ble for inclu­sion again fol­low­ing the issuance of Exec­u­tive Order 14032 in June 2021, which amend­ed the cap­i­tal mar­kets sanc­tions process cre­at­ed by the pre­vi­ous Order, and removed cer­tain Chi­nese mil­i­tary com­pa­nies from the sanc­tions list.  The ratio­nale for remov­ing the com­pa­nies was not dis­closed to the pub­lic.

Notable dele­tions fol­low­ing the semi-annu­al index review include Chi­nese edu­ca­tion and real estate com­pa­nies that have been impact­ed by the Chi­nese government’s recent indus­try crack­downs and lost sig­nif­i­cant mar­ket share, like Chi­na East Edu­ca­tion, Offcn Edu­ca­tion, Poly Prop­er­ty, and Zhen­ro Properties.