MSCI, the global equity index compiler, has warned that it will go ahead and remove those Chinese companies that suspend their shares for more than 50 days. It further said that such firms would also be barred from the index for 12 months.
This announcement comes on the back of its decision to add 222 A-share Chinese stocks in its index. An important point to note here is the fact that this rule is only for Chinese companies, while other companies which can get back into the index after a review process.
The announcement is seen as the fallout of the number of suspended shares rising to unprecedented levels in recent times. An average of 265 shares were suspended from trading during the month of July, up from 202 in January.
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For some time, shares of Chinese companies were not included in the MSCI indexes precisely because of their lack of transparency and their tendency to suspend trading When compared to the global average, the percentage of suspended shares for Chinese companies is easily double or even triple at certain times.
Misusing the System
MSCI’s head of research for Asia Pacific, Chin Ping Chia, said: “The issue is that in a freely accessible market, investors want to be able to get in and get out. If a market falls, they still want to be able to get out. But if you suspend, investors cannot get out, that will be a problem.”
This is acceptable logic in investor circles as investors, especially the bigger ones, are able to tolerate losses and move on rather than becoming trapped with non-performing stock.
Some Chinese companies use the suspension system tactic to lock out smaller traders when a company has had issues and its stock begins to tumble. Instead of allowing the market to react to the issues plaguing the company and taking the hit, the company owners and investors suspend trading, quoting a variety of reasons, and thus preventing smaller investors and traders from getting out.