By year-end Chinese shares will have a 3.3 percent weighting on the index, up from 1 percent now. What was behind the decision?
Henry Fernandez, who has been at the helm of New York-based index provider MSCI for two decades, was forced to defend the decision to increase the weighting of Chinese shares amidst severe criticism.
Skeptics have accused the index provider of being more concerned with the future of its business dealings in Beijing that it is with corporate governance or the frequency with which shares are suspended from trading in China.
Zero Politics?
Fernandez's assertion that «zero politics» was behind the controversial move came in the light of a scathing article in «The Wall Street Journal» which explicitly points fingers at the Chinese government for applying «heavy pressure» on the U.S. firm which has raised the weight of Chinese equities from 1 percent at the end of 2018 to 3.3 percent at the end of 2019.
Interestingly, Chinese equities had no representation on the index prior to 2018. The decision comes despite Chinese indices being amongst the most volatile during the last quarter of 2018, ending the year down as much as 25 percent. Analysts believe the 23 percent rebound in the stocks this year, is attributable in part, to MSCI's decision – the equity benchmark is tracked by $1.9 trillion of global money.
Vague Explanation
Critics have also questioned Fernandez's «vague» explanation of the decision to give Chinese stocks greater importance on a benchmark index at a time when they face significant uncertainty from a trade war with the US.
«It is based on the analysis we come up with,» he said, «we take the information and create a thesis and talk to hundreds of investors.» He did not elaborate on what might have caused such a drastic switch in the investment thesis over a relatively short time, hitting back at skeptics instead. «It's impossible to be subject to political influence,» he added.
