Why China should be separated from emerging market indices

China accounts for 41.1% of the MSCI Emerging Markets index

Tom Eckett

a building with red roofs and a mountain in the background

China’s dominance in emerging market indices has grown to such a level that index providers need to start separating Asia’s largest economy out from their flagship indices.

Described by the World Bank as “the fastest sustained expansion by a major economy in history”, China’s annual average GDP growth rate of 9.5% since 1979 is nothing short of astronomical.

In recent years, index providers, in particular, have looked to capture a piece of this growth by adding mainland Chinese equities, known as A-Shares, to its major indices.

Along with the regular H-Shares, listed in Hong Kong, China has come to dominate emerging market indices to such a degree that they no longer offer the diversified exposure investors look for in a broad-based index.

Highlighting this, MSCI’s flagship Emerging Markets index has a 41.1% weighting to China, as of 31 July, while other countries have seen their weighting diminish.

According to RenCap data cited by the Financial Times, Brazil’s weighting has fallen to almost all-time lows of 5.4%, down from 16% in 2010, while Mexico makes up just 1.9% of the index, a record low and miles off the 13.2% weighting seen in 1997.

These developments highlight just how China-centric major indices such as the MSCI Emerging Markets index have become while adding fuel to the flames as to why China needs to be seen as independent from the rest of the emerging market universe.

Steps have been taken to address this problem. Last year,  Lyxor launched the MSCI Emerging Markets ex China UCITS ETF (EMXC) which offers investors access to emerging markets without Chinese stocks within the portfolio.

Why this is so effective is it allows investors to gain exposure to the broad emerging market arena while concentrating Chinese exposure through a China-specific vehicle.

As Chanchal Samadder, head of equities at Lyxor, said: “This ETF allows investors to gain a broad exposure to some of the world’s most dynamic developing countries and, at the same time, make their own independent allocations to China.”

China’s increasing importance on the global stage combined with its dominance within emerging market indices is why there should be a greater focus on China as a single-country play.

This will, in turn, enable emerging market indices to offer the diversification benefits a broad-based index should.


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