MSCI index significantly increases inclusion of Chinese companies; will passive funds start a new round of "buying spree"?

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Chinese stocks are experiencing the largest scale inclusion into the MSCI Index in nearly three years. This adjustment will not only lead to direct capital inflows, but may also prompt global active funds to re-examine the value of allocating to the Chinese market.

MSCI announced on Tuesday that during the latest review, it will include 37 Chinese companies in its Global Standard Index and remove 16, for a net increase of 21 companies. This is the largest expansion of Chinese stocks by the index provider since May 2023.

This adjustment provides new support to the Chinese stock market. Since last year, Chinese stocks have undergone an unexpected rebound. Greater index weight means passive investors will automatically increase their holdings of Chinese stocks, and active funds may likewise reassess their exposure to the world's second-largest stock market.

It is noteworthy that technology companies dominate the new additions, while several consumer companies were removed. This highlights investors’ ongoing focus on artificial intelligence and innovation-related enterprises, as well as the structural changes taking place in the Chinese market.

Largest Inclusion in Nearly Three Years

According to data compiled by Bloomberg, MSCI's net addition of 21 Chinese companies sets a three-year record. The last time there was such a large-scale inclusion was back in May 2023.

This adjustment will directly influence allocations by passive funds tracking the MSCI Index. "This increase in weighting could mark the start of a trend for some time," said Jun Bei Liu, co-founder and chief portfolio manager at Ten Cap Investment. She added that it could "spark more buying of Chinese stocks."

The appeal of the Chinese stock market is growing. As enthusiasm for US asset allocation fades, China’s technological progress and resilience in trade are drawing renewed global investor attention. Higher index weighting could prompt active fund managers to review their Chinese holdings.

Tech Stocks Dominate the New Additions

Among the newly included companies, tech firms dominate. The additions feature semiconductor products manufacturer Advanced Micro-Fabrication Equipment Inc. (Shanghai), autonomous driving technology provider Pony AI, and quantum information products manufacturer QuantumCTek.

Meanwhile, several consumer companies have been removed from the index. This change reflects the current focus of investor interest: artificial intelligence and innovation-related fields remain the key targets for capital pursuit.

Hao Hong, Chief Investment Officer at Lotus Asset Management, noted that more companies are likely to be included in the future since "new growth comes from emerging industries." He stated, "Global investors should pay increasingly more attention to the mainland China market to find genuine growth opportunities."

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