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Excluded red chips hit out at MSCI move

Clara Li

Red chip companies not included in the Morgan Stanley Capital International's (MSCI) China Free Index last week are threatening to take up the issue with the United States-based investment bank.

Sources from the red-chip companies said new criteria for inclusion and reasons for their exclusion from the MSCI China Free Index was unclear.

They said large capitalised companies such as China Resources Holdings had been ignored, while less established small caps had been included in the index.

It is rumoured that some of the red chips will appeal to MSCI to re-evaluate its criteria and change its decision on the indexed firms.

A spokesman from an excluded firm said the company would make an announcement about its reaction to the MSCI China Free Index decision early this week. He said he felt 'helpless' about the situation and did not understand the reason for exclusion.

John Fildes, an executive director of MSCI brushed aside the claims from red chip companies, saying its recent moves were clearly defined.

'Our principal criteria is to endeavour to capture 60 per cent of the market capitalisation of each industry group,' he said. 'We are not trying to create a telecom index, or a technology index,' he said, pointing to the inclusion of agriculture company Top Glory.

Mr Fildes, who also heads MSCI's Asian operations, said red-chip companies were never included in the MSCI China Free Index in the past, as they, as an asset class, did not meet MSCI's definition of domicile.

In addition, the volatile nature of these stocks made the inclusion difficult, he said.

The companies previously included in the MSCI China Free index were H shares, B shares, and N shares - the latter mainland companies listed on the New York Stock Exchange.

'Over the last year in particular, it has become apparent that red chips are an established asset class through which international investors gain exposure to PRC,' said Mr Fildes.

'That is why we made a decision to amend the criteria for their inclusion in our China Free Index,' he said.

The reason some companies in the index were deleted was because they were 'relatively illiquid and had a low free float', he said.

The MSCI official said being included in the MSCI China Free Index did not mean an investment in that particular company's stock was a good bet.

'And non-inclusion does not mean it is not a great investment,' he said.

Mr Fildes said the impact 'will spread over a sizeable period of time from now to the end of May, when the new index becomes effective'.

The revision of the China Free Index will see the mainland's weighting rise to 9.58 per cent from 0.61 per cent in the MSCI Far East Free ex-Japan Index, which is closely studied by fund managers.

Analysts said the move was positive, and would see an increased inflow of foreign funds to the mainland markets.

'Because of the Internet mania, there is an abundance of quality, cheaply priced Hong Kong and China stocks ignored by both institutional and retail investors, who now only have eyes for hot technology stocks,' said Cheah Cheng Hye, a fund manager at Value Partners.

Fund managers and analysts are upbeat on prospects of mainland stocks making headway as a result of the increase in China weightings.

The best performing market in Asia so far this year is the Shanghai A and B shares market, which have appreciated 28.07 per cent and Shenzhen A and B shares, which have risen by 35.97 per cent.

'This reflects the positive fundamentals of the economy and government incentives to stimulate the market. The domestic market is already excited about the recovery,' said Mr Cheah.

The cheapest way to invest in the mainland market, according to Mr Cheah, is through B shares, which are trading at 70 to 90 per cent of the A shares.

Rumours have circulated of late that the Chinese regulators will allow the setting up of mutual funds to raise money from mainland investors in the B-share market.

Analysts said this was a significant step towards the convergence of the A share and B share markets and would eventually push up B shares sharply.

Fund managers have recommended Ng Fung Hung, a food distributor, TCL International Holdings, and computer concern Legend Holdings.

Clara Li

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