The MSCI China Index was launched on 31 October 1995, some seven years after the launch of the MSCI Emerging Markets Index. From March 2001 to March 2018, the MSCI China Index generated annualised total returns of 12.2% versus 6% for the MSCI World Index and 10.7% annual returns for the MSCI Emerging Markets Index.
More recently, Chinese stocks have been strong relative performers. In 2017, the MSCI China Index surged 54.1%, while the MSCI World Index advanced 22.4%.
Chinese stocks' strong absolute and relative performance has come with a heaped helping of volatility. The MSCI China Index has experienced much greater than the MSCI World Index.
Changes in Definition and Composition
China was not included in the MSCI Emerging Markets Index at its January 1988 inception, nor did MSCI recognise it as a stand-alone country at that time. Back then, Malaysia was the country with the highest weighting in the index, at 33.8%.
On 3 September 1996, China was added to the MSCI Emerging Markets Index at a weighting of 0.46%. This was negligible in the context of the emerging-markets benchmark and even more so within the MSCI All-Country World Index.
Over the next two-plus decades, the definition and composition of the Chinese stock market changed dramatically. In the early days, the market was made up of a number of B-Shares and H-Shares. Eventually, more Chinese red chips and H-Shares were added to the mix as they listed their shares in Hong Kong in the early 2000s. Most recently, U.S.-listed ADRs were included in the MSCI index in November 2015.
As of March 2018, China's weighting in the MSCI Emerging Markets Index had increased to 29.9%. This is significantly greater than the next three largest countries included in the benchmark: South Korea at 15.1%, Taiwan at 11.8%, and India at 8.1%.
There have been significant changes among the top five constituents of the MSCI China Index every five years over the past two decades. These changes are attributable to a combination of 1) changes to the index's inclusion rules; 2) new listings and IPOs being added to the index; and 3) the structural transformation of the Chinese economy.
The information technology sector went from representing just 2% of the index in 2007 to becoming its largest sector by the end of March 2018, making up 41% of the benchmark's value. Meanwhile the telecommunications sector has shrivelled from 21% to 4% of the index's value.
This is, in part, evidence of the diminishing footprint of the traditional telecommunications industry and the rise of newer and more innovative communication, commerce, and entertainment platforms.
Tech Firms Dominate
Most notably, it reflects the emergence of a pair of tech giants—Tencent Holdings (00700), listed in Hong Kong, and Alibaba Group (BABA), listed in the United States. Tencent Holdings was the first Internet company to list on the Stock Exchange of Hong Kong when it made its debut in June 2004. It was added to the MSCI Hong Kong Index in May 2007 and subsequently transitioned to the MSCI China Index in May 2008.
During the roughly 10 years that Tencent has been a member of the MSCI China Index, its total market cap has risen 174-fold, from $3 billion to $525 billion. Its weighting in the MSCI China Index increased from just under 2% at the time of its inclusion to 18% as of the end of March 2018.
The other tech giant, Alibaba, listed on the New York Stock Exchange in September 2014. Despite Alibaba's size; a $168 billion market cap at its IPO, it was not initially included in the MSCI China Index.
In November 2015, MSCI decided to include foreign listings of Chinese companies in the index. This decision resulted in the U.S.-listed ADRs – Alibaba, Baidu, Ctrip, JD.com, and so on, being added to the MSCI China Index. These stocks accounted for around 20% of the index upon the completion of a two-phase inclusion process.
This also led to some significant changes to the sector composition of the index, most notably an increase in the weighting of the technology sector. In addition to the expansion of the tech sector, we have also seen the consumer staples and consumer discretionary sectors expand their share of the benchmark's value from 6% to 11%. This has been driven by growth in the consumer discretionary sector which, in turn, is linked to the Chinese domestic consumption growth story.
