The organization is deleting 10 securities of Chinese companies from its Global Investable Market Indexes. This follows President Donald J. Trump's executive order to ban US citizens from investing in firms deemed to be entwined with China's military, security and intelligence forces.

MSCI, provider of many market indices used by investors, will remove seven Chinese companies from indexes, it said yesterday. The US government alleges that the firms help China’s armed forces, including the nation’s top chipmaker and a producer of surveillance gear.

The move will take effect by the close of business on January 5, 2021. It follows similar actions by index providers such as FTSE Russell and S&P Dow Jones Indices. It will affect 10 securities that trade in either Hong Kong, Shanghai or Shenzhen.

To some extent the move is a ratcheting up of protectionist measures by the Trump administration against China, justified on various grounds ranging from the supposed harm Chinese imports cause for US employment through to anger at theft of Western intellectual property rights. Relations continue to be tense since the outbreak of the COVID-19 pandemic, as well as Beijing's imposition of a national security law on Hong Kong.

In November President Trump ordered that US citizens should not invest in 31 Chinese companies that the US Defense Department said supply and support Chinese military, security and intelligence services. It remains to be seen whether President Trump’s executive order is to be overturned by President-elect Joe Biden. 

“Based on feedback from more than 100 US and non-US market participants, the [Executive] Order may have a significant impact on the investment processes of global investors. Consultation participants highlighted that the ramifications of the Order would effectively challenge the investability of the impacted securities from the perspective of international institutional investors,” MSCI said in a statement yesterday. 

“In particular, non-US market participants noted that the extensive presence of US entities, such as commercial banks, broker-dealers, and custodians, within their chain of financial intermediaries would significantly limit their ability to transact in the impacted securities,” the group said. 

The move could be an asset allocation blow for wealth managers and other investors with Chinese equity exposures - a problem as China has, arguably, fared relatively well in recovering this year from the COVID-19 pandemic and Chinese GDP is slated to have actually grown this year, contrasting with much of the West.

The organizations affected by MSCI’s index removal include:

SMIC; China Communications Construction; China Spacesat Co; China Railway Construction; CRRC Corp; Hangzhou Hikvision; and Dawning Info. A total of 10 securities are affected – several are listed in Hong Kong as well as in Mainland China.

MSCI said it will announce the final list of security deletions on December 30 this year.