The move could have a bigger effect on company stocks than the New York Stock Exchange’s decision to delist them.
MSCI Inc. will remove China’s top three telecommunications companies from its indexes on Friday, giving global funds a single day to adjust billions of dollars in passive investments.
The index provider’s decision to remove China Mobile Ltd., China Telecom Corp. and China Unicom Hong Kong Ltd. at close of business applies to their stocks in Hong Kong, which are much more actively traded than those to be delisted by the New York Stock Exchange. The rebalancing rush has brought the volume of all three stocks to at least seven times the daily average over the past three months.
The deletions add further selling pressure on stocks which have rocked sharply this week amid confusion over whether they should be included in a US ban on investments in Chinese companies with military ties. Passive investors, market makers and portfolio traders typically have weeks to prepare for large index changes, which can be the busiest days of the quarter. A Hong Kong trader at a New York-based bank said customer demand was so overwhelming on Friday that employees from other teams were called in to help.
China Unicom shares fell 11% in Hong Kong on Friday, while China Mobile and China Telecom fell about 10%. China Mobile was the most traded stock in Hong Kong, with about $ 2.3 billion changing hands in the morning – the second highest on record.
“Clearly, this is negative – investors were given very short notice to prepare for the cuts,” said Kenny Wen, wealth management strategist at Everbright Sun Hung Kai Co Ltd. “Reversing these decisions has created a lot of headache and confusion.”
According to the company, more than $ 1 trillion was invested in equity exchange-traded funds that tracked the MSCI indices in November. Global active fund managers also use MSCI indices to benchmark their positions, with some $ 12 trillion tied to MSCI gauges. About 40% of its index subscribers were based in the Americas, MSCI said in a recent presentation.
S&P Dow Jones Indices also said it would remove the three telecom companies as of Monday, having earlier canceled plans to do so in a series of rockers that mirrored those of the NYSE. For its part, FTSE Russell removed China Mobile and China Telecom from its FTSE China 50 index.
The drama has baffled investors since Donald Trump issued an executive order in November banning investments in companies considered by the United States to be owned or controlled by the Chinese military. The ambiguously worded order was part of Trump’s efforts to punish China in the final days of his presidency. His administration has sought to sever economic ties and deny Chinese companies access to US capital, especially those deemed to pose a threat to US national security.
The three telecom operators said Thursday they had complied with all rules since listing in the United States and would seek professional advice to protect their “legitimate rights” or “legitimate interests”. They all advised investors to be cautious when trading their securities.
China Mobile is among the largest stocks in the MSCI China Index, weighing around 1.1%, according to data compiled by Bloomberg. The company’s New York-listed shares fell 6% at the close on Thursday, slipping an additional 3.4% in extended trading after MSCI’s announcement.
Bloomberg LP, the parent company of Bloomberg News, also compiles stock and bond indices.
One question still looming in the market is whether China seizes measures taken by MSCI, NYSE and others to fight back. Some analysts have speculated that Beijing may hold fire until authorities have a better idea of how US policy toward China will develop after Joe Biden enters the White House later. this month.
It is also unclear whether large investment firms such as BlackRock Inc. and Vanguard Group will adjust their product offerings to accommodate international funds that still want exposure to stocks affected by the U.S. ban. The companies, along with many others on Wall Street, have stepped up their activities in China after the country eased restrictions on foreign financial companies last year.
Investors are also watching closely whether the United States will extend its restrictions to other blue-chip Chinese companies. Alibaba Group Holding Ltd. and Tencent Holdings Ltd. conducted a liquidation of tech stocks on Thursday after announcing that the Trump administration was considering adding them to its list of banned companies. The two companies have a combined market value of $ 1.3 trillion.