Macroscope | Is it time to drop China from emerging market indices? Easier said than done
- It is true that China-related risks, from the trade war to the crackdown on private-sector activities, have become more acute
- However, China’s removal from the MSCI Emerging Markets Index would still leave the gauge with a bias towards Asia
Has China outgrown the main emerging market stock indices, and should it be separated from the gauges to help investors exploit opportunities and manage risks in developing economies more effectively?
These questions have become more pertinent as China’s weight in the benchmark MSCI Emerging Markets Index has doubled over the past five years, reaching as much as 43 per cent in the fourth quarter of last year.
The outsize weight and influence of the world’s second-largest economy in emerging market indices have given impetus to a debate in the investment community over the merits of carving China out of the indices to help build an “emerging market ex-China” asset class.
While MSCI launched an index in 2017 that tracks non-Chinese stocks in developing economies, it has proved extremely illiquid compared with investment vehicles that offer traders exposure to Chinese equities.
However, in a provocative report published on October 20, Goldman Sachs made a case for a major emerging market ex-China asset class, citing the positive effects of Japan’s separation from MSCI’s Asia index in 2001 after the country’s share had grown to more than 70 per cent. Following the carve-out, both Japan’s and the rest of Asia’s stock markets continued to attract hefty inflows.