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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.