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Suzanne Harrison

To many Hong Kong portfolio managers, Morgan Stanley Capital International's (MSCI) Tuesday confirmation of Asian index changes was a disappointment.

 The benchmark index compiler had pre-empted an announcement earlier in the day and the word in Hong Kong was that China Telecom (Hong Kong) was to be included in the group's series, paving the way for other heavyweight mainland plays.

 China Telecom's shares had jumped on the market expectation, rising 6.63 per cent to $40.20 on Tuesday. However, yesterday the counter lost those gains to close at $37.60, since the MSCI announcement instead concerned Taiwan and Malaysia.

 Sources said it was logical and timely that China Telecom - the second biggest blue chip after HSBC Holdings - be brought into the MSCI series.

 Its growing popularity with international fund managers is apparent by its 52.53 per cent rally since a highly successful multi-billion dollar share placement late last month.

 The World Trade Organisation agreement between Washington and Beijing and China Telecom's share price outperforming both the MSCI Hong Kong and the MSCI China Free indices this year add more incentive.

 Indocam Hong Kong chief investment officer Ayaz Ebrahim was surprised that it was taking the MSCI so long to include China Telecom.

 'It's logical as China companies become more open to overseas investment,' he said.

 China Telecom's weighting in the Hang Seng Index at yesterday's close was 14.42 per cent, compared with 27.43 per cent for heavyweight HSBC.

 HSBC is also not included in MSCI's Hong Kong Index but is included in the group's British benchmark.

 '[China Telecom] is a company that institutional investors like,' Mr Ebrahim said. 'We've been waiting for it [to be included in the MSCI series] for some time. I think you will see more Chinese companies having a larger slice of the cake.'  MSCI's divergence from the benchmark Hang Seng Index will only grow as several leading industrial groups are expected to list early next year in Hong Kong - and possibly gain express entry into the blue-chip index - including oil giant China Petrochemical Corp (Sinopec) and telecommunications firm China Unicom.

 Morgan Stanley Asia executive director John Fildes said MSCI was looking into the possibility of including China Telecom in an index, but nothing definite was on the board.

 'There is always speculation about what is going on in the MSCI indices,' he said.

 'A lot of managers have asked us about China Telecom and it's something that we are looking at. Because of WTO, I think people are thinking that MSCI will make a sudden change.

 'But we don't make sudden changes. I can't comment on when or if anything will be done . . . it is on our radar screen.'  Mr Fildes said that if China Telecom was to be included in the China Free Index, it would take up a whopping 85 per cent weighting.

 'That is not a good way to build an index,' he said.

 The China Free Index at present only includes H shares, B shares and the N shares listed in the United States.

 Thus many of the larger mainland listed groups - red chips such as Beijing Enterprises Holdings or Shanghai Industrial Holdings - are also not counted in the group's indices.

 Mr Fildes said it was not an option to include China Telecom in its Hong Kong index since the MSCI viewed the mainland as an emerging market and Hong Kong as developed.

 'Most investors choose these [developed market indices] for very specific reasons,' Mr Fildes said. 'If you have a US investor putting his pension fund in a developed market, it's a different risk profile [from the emerging markets].

 'We can't see that changing in the near future . . . not as long as we see China as an emerging market.'  Many brokers believe pressure for changes to the index will be coming not just from fund managers, but from Beijing.

 Mainland officials were said to be irate when MSCI announced in August a 100 per cent weighting for Taiwan in its index series, just as cross-strait relations were at a low ebb over a perceived challenge by Taiwan to the 'one-China' policy.

 The index compiler has since decided to phase in the full weighting over 12 months, beginning at the end of May next year.

 One analyst believed including China Telecom into an MSCI index series would placate officials displeased with Taiwan's reweighting.

 'What I heard months ago was that Morgan Stanley was being very heavily squeezed by China because of its Taiwan decision,' he said.

 'I was told that by February [next year] Chinese companies would be added.'  Mr Ebrahim said an inclusion of China Telecom into an MSCI index would be a huge positive for the stock.

 He said there were some funds that bypassed companies not weighted by the MSCI.

 'There are some funds that would just ignore it' he said.



MSCI changes leave red chips in the cold