Leading Global Index Provider MSCI Has No Plans to Decouple From China

Medical workers spray antiseptic outside of the main gate of Shanghai Stock Exchange Building in Shanghai on Feb. 03, 2020. (Yifan Ding/Getty Images)

WASHINGTON—Morgan Stanley Capital International (MSCI), one of the largest index providers in the world that influence how investors deploy their funds, has no plans to adjust its global indexes to exclude companies owned by the Chinese Communist regime, despite mounting concerns over national security and human rights.

During the annual shareholder meeting on April 28, MSCI Chairman and CEO Henry Fernandez expressed no plans to consider removing China’s state-owned companies from its indexes.

In response to a question by the National Center for Public Policy Research, a Washington-based conservative think tank, Fernandez said that fund managers are free to choose any index as a benchmark. He avoided directly answering the question about the rising concerns over U.S. federal pension investments in Chinese stocks.

“In general, I will say that all clients of MSCI around the world have a choice of any index benchmark they wish to use pursuant to their stated investment objectives,” he said. “Some of them may use our standard indices, which include all companies, whether state-owned or not state-owned, that are publicly listed, whether they are in China or in France or in the U.S., and those are the standard indices that we offer.”

Based in New York, MSCI Inc. provides investment data and analytics services to institutional investors. The company is best known for its benchmark indexes such as the MSCI Emerging Market Index, which influences the investment decisions of funds. More than $1.8 trillion in assets globally are benchmarked against the index as of September 2018.

Last year, the firm quadrupled China’s weighting in the emerging-markets index. The company announced in December 2019 that the index included 472 China A-share companies and China’s weight in the index rose to 33 percent from 28 percent in 2017.

In February last year, The Wall Street Journal reported that MSCI “came under heavy pressure from the Chinese government, which tried to curtail the company’s business in the country.”

The index provider, as a result, had to increase the weighting of Chinese shares in its global benchmarks, leading billions of dollars to flow into Chinese shares, the report said.

Thrift Savings Plan

Almost all investments by U.S. pension funds in global stocks are benchmarked against MSCI indexes, and this includes the federal workers’ retirement fund, the Thrift Savings Plan (TSP).

In October, a group of bipartisan senators led by Sens. Marco Rubio (R-Fla.) and Jeanne Shaheen (D-N.H.) called on TSP to stop its plan to use the MSCI index as a benchmark for its investments.

The companies included in the index “assist in the Chinese government’s military activities, espionage, and human rights abuses, as well as many other Chinese companies that lack basic financial transparency,” they warned in a letter.

Among the Chinese companies in the index are the Aviation Industry Corp. of China and China Unicom, which are contractors to the People’s Liberation Army, supporting Beijing’s aggressive military activity in the South China Sea.

The other companies include Hangzhou Hikvision, which is blacklisted by the U.S. Department of Commerce, and ZTE Corp., which was fined last year for violating U.S. sanctions.

Several Republican lawmakers and former U.S. officials have called on the Trump administration to end federal pension investment plans in Chinese companies due to national security concerns or human rights violations, Reuters reported on April 21.

A senior administration official told The Epoch Times that “no decision has been made yet” by the White House to prevent the TSP from investing in the Chinese-held entities.

Contrary to an actively managed fund, a passive index fund mimics a benchmark such as MSCI. Trillions of dollars worldwide passively track such indexes.

One of the nation’s largest public pension funds, the New York State Teachers Retirement System (NYSTRS) said that the fund’s investment in Chinese stocks isn’t chosen by a portfolio manager, but instead automatically selected to match an index.

As of June 2019, NYSTRS held 81,802 shares of Hikvision, which came under scrutiny for its involvement in human rights violations in China, including mass detention, surveillance, and racial profiling.

“NYSTRS’ exposure to Hikvision continues to be primarily tied to a passively managed portfolio that seeks to match its benchmark index,” the fund’s spokesperson told The Epoch Times.

“The number of shares held in this passively managed portfolio have remained relatively steady from quarter to quarter, with any changes related to index weighting. We continue to monitor the situation.”