MSCI to Include 234 New Chinese Companies in its Emerging Markets Index, including Prominent Military Contractors

On May 14, after three years of deliberation, global index provider MSCI released a list of Chinese A‑shares (stocks of Chinese companies traded on the Shanghai and Shenzhen stock exchanges) to be included in its MSCI Emerging Markets Index (MSCI EM Index), starting on June 1. The MSCI EM Index previously only included shares of Chinese companies listed in Hong Kong or the United States.

MSCI, formerly Morgan Stanley Capital International, is the common benchmark for global stock funds. Its indices are used as the baseline for many emerging market growth mutual funds and exchanged traded funds (ETFs). The MSCI EM Index consists of indices from 23 emerging markets and has over $1.6 trillion active and passive assets benchmarked against it. With the inclusion of domestic Chinese stocks, the MSCI EM Index could reportedly bring over $400 billion in funds from offshore investors (including American institutional and individual investors) into mainland China’s equity markets over the next decade.

The MSCI selection criteria for market inclusion are: market accessibility, size and liquidity, and sustainability of economic development.  There are concerns, however, that MSCI may not have performed adequate security-minded due diligence when selecting these Chinese companies heretofore traded on their domestic equity exchanges.

For example, among the companies that will gain access to the $1.6 trillion in funds under management are the now-infamous telecommunications company, ZTE Corporation, and PLA contractor, China Shipbuilding Industry Group Power, which appears to be a subsidiary of China Shipbuilding Industry Corp. (CSIC).  CSIC is presently constructing China’s first nuclear aircraft carrier and a number of other sophisticated weapons systems (e.g., nuclear submarines, quiet submarines, maritime unmanned intelligent countermeasure systems, naval warfare comprehensive electronic information systems, etc.)  The new nuclear-powered carrier is also reportedly being designed to carry airborne early warning and control aircraft, anti-submarine helicopters, and stealth attack drones. 

Also included on the list of 234 companies scheduled for inclusion is AVIC Aircraft Corporation, which is part of the Aviation Industry Corporation of China (AVIC), a manufacturer of aircraft, unmanned aerial vehicles (UAVs), and short and medium-range missiles for the People’s Liberation Army (PLA).