China still an emerging market?

[Brian1995]

Hello,
My foreign equity is split between 40% VEA and 60% VWO.

I'm wondering what will happen if (or when) China is no longer considered as an emerging market: does that mean that VWO will collapse because investors will massively sell VWO?

Does that mean that chinese stocks will be part of VEA and that VEA will surge?

Thanks a lot!

[whodidntante]

I do not mean this as a political comment, but more as a statement of fact regarding why China's classification of an EM is likely to remain for decades.

EMs are not decided based on the size of the economy. China is properly classified as an EM due to a lack of consistent investor protections, and the lack of a free market. You could, for example, bring a complaint against a company in France, and it's likely that the complaint would be treated fairly even if you don't win. In China, the courts serve the interests of the party. So you will be treated fairly to the extent that your interests align with the party.

It would take an enormous shift in the institutions, culture, and system of government for China to be a developed market. They could still be a developed market even if the size of the market was cut in half.

[retired@50]

I would expect a slow-moving trend rather than a huge bounce on a single day.

Getting consensus on whether or not China is still an emerging market isn't as easy as deciding whether or not a stock is in the S&P 500.

Accounting standards, among the many other issues in China, won't change overnight.

Regards,

[backpacker61]

South Korea is still classified as an 'Emerging Market' by MSCI.

https://www.msci.com/our-solutions/inde ... ng-markets

It will take a long time before China will be categorized as a developed market.

[David Althaus]

You may want to consider the benefit of total exUS fund at Vanguard. That way these (proper or faulty--who can really know) definitions, what's in what's out, and worrying about the distinctions become moot. You will hold almost all ex US stocks based on their market cap regardless of country. Voila.

All the best

[mokaThought]

If you must overweight EM and are concerned about the classification issue, you could avoid it by holding IDEV (iShares MSCI Developed Markets ETF), EMXC (iShares MSCI Emerging Markets ex-China ETF), and a China ETF at your preferred weights. But as others have pointed out, China will continue to be emerging for a good long time, and I would even say they're going in the wrong direction (away from developed status).

[aristotelian]

I do not mean this as a political comment, but more as a statement of fact regarding why China's classification of an EM is likely to remain for decades.

EMs are not decided based on the size of the economy. China is properly classified as an EM due to a lack of consistent investor protections, and the lack of a free market. You could, for example, bring a complaint against a company in France, and it's likely that the complaint would be treated fairly even if you don't win. In China, the courts serve the interests of the party. So you will be treated fairly to the extent that your interests align with the party.

It would take an enormous shift in the institutions, culture, and system of government for China to be a developed market. They could still be a developed market even if the size of the market was cut in half.

The term literally refers to the economic system (market) not the government, although certainly the political context is one factor. Here is the criteria that MSCI uses. The factors you are talking about may fall under the market accessibility bucket but that is only one bucket. Other entities look at per capita income etc.
https://www.msci.com/documents/1296102/ ... 4881b759bf

To answer OP's question, it is impossible to know what the effect will be. If China is considered a mature economy by then, it is possible that VWO takes off due to the "next China" wherever that happens to be.

[hi_there]

With $17k-ish PPP adjusted GDP per capita and hundreds of millions of rural poor, China's population, for the most part, has nowhere near the income or standard of living typical of a developed nation. The fact that the country's huge population and large aggregate GDP is a reason to pause and think if this is a special case. However, the aforementioned low income per citizen and transitional state of its overall economic activity should squarely categorize it as an emerging, rather than developed market. China is decades away from changing this.

[wwtom111]

As premier Li Keqiang used to say, approx. 600 million Chinese people has a monthly salary less then $150 and 700 million people living with a salary under $300.

Total Chinese population is about 1.4 billion. And among them, equivalent to 2X of entire USA population is living under $300/month.

[LadyGeek]

The discussion is trending towards socio-economic status.

Please stay focused on the investing aspects.

[willthrill81]

It's still considered to be an EM by most, and that's not going to change soon.

It doesn't matter much to me since I have no interest in owning anything in China for reasons already mentioned.

[X528]

As premier Li Keqiang used to say, approx. 600 million Chinese people has a monthly salary less then $150 and 700 million people living with a salary under $300.

Total Chinese population is about 1.4 billion. And among them, equivalent to 2X of entire USA population is living under $300/month.

China has very serious demographic problems (e.g., far too many men than women and long lasting effects from the former 1-child policy). China will get old, before it gets rich.

[alex_686]

With $17k-ish PPP adjusted GDP per capita and hundreds of millions of rural poor, China's population, for the most part, has nowhere near the income or standard of living typical of a developed nation. The fact that the country's huge population and large aggregate GDP is a reason to pause and think if this is a special case.

As other have mentioned, EM does not refer to the economy but to the quality of the market. Liquidity, investment services (e.g. custodial services), integration in the world market, fairness (intendent audits, minority rights, insider trader enforcement), etc.

For example, even the least develop part of the EU qualifies as DM because of its regulations. There are countries that are still classified as EM even though their economies might be more sophisticated.

And while large parts of China are still underdeveloped and poor, other parts and world class. What about those companies? Some of those companies have issued sponsored ADRs in the US, which places them under SEC purview. So the quality of these stocks are about the same as DM. There are nuances here.

[tenkuky]

Speaking of which (and not to hijack this thread)...
I just got the semi-annual report for my Fidelity holdings. I hold the FSGGX in my work retirement plan.
It is supposed to track the MSCI All-Country World Index.
I was mildly surprised to see CAYMAN ISLANDS as holding a large (almost 9%) amount of the fund vs. China at 3.6%.
Turns out the 3 biggest holdings in Cayman are Alibaba, Tencent and Meituan. Wait, aren't these Chinese firms, and does that mean incorporation of these firms in the Islands qualifies as that country is where the holdings are?
I rarely read these reports but this caught my eye.
To be actionable, I don't have much in terms of options, but is this anything I should do anything about?

[TropikThunder]

The term literally refers to the economic system (market) not the government, although certainly the political context is one factor. Here is the criteria that MSCI uses. The factors you are talking about may fall under the market accessibility bucket but that is only one bucket. Other entities look at per capita income etc.
https://www.msci.com/documents/1296102/ ... 4881b759bf

A quick summary of the DM criteria that MSCI uses (note that a country must satisfy all three criteria simultaneously):

• Economic Development: Country GNI per capita 25% above the World Bank high income threshold for 3 consecutive years
• Size and Liquidity Requirements: at least 5 companies with a full market cap of at least $3B; a market float of at least $1.5B, and at least 20% Annualized Traded Value Ratio (ATVR) [meaning ~20% of the value of the market changes hands each year]
• Market Accessibility Criteria: various items measuring how "difficult" it is for investors to participate, including openness to foreign ownership, ease of capital flow, and efficiency, stability, and availability of the overall "market"

On a strictly objective basis, China does not currently meet the Economic Development criteria as their GNI per capita ($10,410) is actually below the high income threshhold (~$12,600). They'd need it to have been ~$15,750 for 2019 (and maintain that for three years) so that's a ways off. There are dozens of publicly traded Chinese companies at least $5B market cap, so it's safe to say at least 5 of them have enough float. I don't know what their ATVR is, and the rest of the criteria are somewhat subjective. Based on their per capita income though, China doesn't qualify now and won't for a while.

[000]

Speaking of which (and not to hijack this thread)...
I just got the semi-annual report for my Fidelity holdings. I hold the FSGGX in my work retirement plan.
It is supposed to track the MSCI All-Country World Index.
I was mildly surprised to see CAYMAN ISLANDS as holding a large (almost 9%) amount of the fund vs. China at 3.6%.
Turns out the 3 biggest holdings in Cayman are Alibaba, Tencent and Meituan. Wait, aren't these Chinese firms, and does that mean incorporation of these firms in the Islands qualifies as that country is where the holdings are?
I rarely read these reports but this caught my eye.
To be actionable, I don't have much in terms of options, but is this anything I should do anything about?

The correct answer is that what you "own" in Alibaba, Tencent, and Meituan is not equity at all, i.e. you're not entitled to equity - equal treatment per share.

[BabaWawa]

Hello,
My foreign equity is split between 40% VEA and 60% VWO.

I'm wondering what will happen if (or when) China is no longer considered as an emerging market: does that mean that VWO will collapse because investors will massively sell VWO?

Does that mean that chinese stocks will be part of VEA and that VEA will surge?

Thanks a lot!

That's a serious overweight to EMs. Curious how you decided on it? Last I checked EM was about 23% weighting within VXUS (Vanguard Total international market).

[Brian1995]

Thanks a lot for your input. I appreciate it.

You're right, EM weight about 25% within VXUS but I made the decision to overweight EM based mainly based on the current and future demographics of these countries. The growing scientific culture in China and India, and the rise of consumer culture in those markets may be conducive to more growth than in developed countries in the long run (developed countries VEA are still 40% of my foreign equity portfolio).

That said, in all honesty, I don't pretend to predict the future and I agree that overweigthing a market over another is an "unorthodox" approach.

[ruralavalon]

Thanks a lot for your input. I appreciate it.

You're right, EM weight about 25% within VXUS but I made the decision to overweight EM based mainly based on the current and future demographics of these countries. The growing scientific culture in China and India, and the rise of consumer culture in those markets may be conducive to more growth [emphasis added] than in developed countries in the long run (developed countries VEA are still 40% of my foreign equity portfolio).

That said, in all honesty, I don't pretend to predict the future [emphasis added] and I agree that overweigthing a market over another is an "unorthodox" approach.

However those are predictions about the future.

[nisiprius]

All nine authorities tabulated by Wikipedia in their article Emerging markets consider China to be an emerging market, including index providers FTSE, MSCI, Standard & Poor's, Dow Jones, and Russell.

When I consider all the storm and stress over Tesla being added to the S&P 500, I feel confident that the financial press will be bubbling over with breathlessly excited articles long before China comes anywhere near to being reclassified as a developed market.

[Northern Flicker]

MSCI first promoted China A-shares (Chinese equities that trade on domestic exchanges in China) to emerging market status from frontier market status on 5/31/2018.

[Angst]

This link presents a fairly general collection of information about MSCI market classification:
https://www.msci.com/market-classification

If you want to see some of the specific "criteria" used by MSCI, you might find this one helpful:
https://www.msci.com/documents/1296102/1330218/MSCI_Market_Classification_Framework_2020.pdf

This link can get you started if FTSE is your flavour:
https://research.ftserussell.com/products/downloads/FTSE_Equity_Country_Classification_Paper.pdf


I don't imagine China being categorized as "developed" for at least a decade, probably longer.

[Flashes1]

I wonder if Jack Ma thinks China is still developing (assuming he's still alive)?

[ribonucleic]

Compare China’s infrastructure commitment with ours. Compare the quality of their educational system to ours.

Which do you think offers more potential for economic growth over the next 20 to 30 years?

[alex_686]

Speaking of which (and not to hijack this thread)...
I just got the semi-annual report for my Fidelity holdings. I hold the FSGGX in my work retirement plan.

There is a difference between domiciled, headquartered, incorporated. And lets through in primary exchange.

There are many companies that do not fit into a nice box. There are some US based companies that have evolved where all of their operations are overseas. Are these US companies or not? For those people who criticize S&P slow "subjective" adoption of TESLA into the index, I will point out that all index providers have a investment committee to handle subjective decisions like this.

For the Chinese companies you listed - they are Chinese. This are incorporated in the Cayman Islands as a dodge around China's capital controls. While the index providers have flexibility to apply subjective judgements to reflect reality, mutual funds do not. I can say this as a person who actually wrote the annual report and Statement of Investments. We had to work off of hard objective facts, even if those facts did not align with reality. Even then, sometimes it took a half dozen people a few hours to puzzle out some of these companies. For example, ING had deliberate structured itself so that it was ambiguous if it was a US or a Netherlands company and if its securities were equity or debt.

[alex_686]

Compare China’s infrastructure commitment with ours. Compare the quality of their educational system to ours.

Which do you think offers more potential for economic growth over the next 20 to 30 years?

Looking from Shanghai? About equal.

[tenkuky]

Speaking of which (and not to hijack this thread)...
I just got the semi-annual report for my Fidelity holdings. I hold the FSGGX in my work retirement plan.

There is a difference between domiciled, headquartered, incorporated. And lets through in primary exchange.

There are many companies that do not fit into a nice box. There are some US based companies that have evolved where all of their operations are overseas. Are these US companies or not? For those people who criticize S&P slow "subjective" adoption of TESLA into the index, I will point out that all index providers have a investment committee to handle subjective decisions like this.

For the Chinese companies you listed - they are Chinese. This are incorporated in the Cayman Islands as a dodge around China's capital controls. While the index providers have flexibility to apply subjective judgements to reflect reality, mutual funds do not. I can say this as a person who actually wrote the annual report and Statement of Investments. We had to work off of hard objective facts, even if those facts did not align with reality. Even then, sometimes it took a half dozen people a few hours to puzzle out some of these companies. For example, ING had deliberate structured itself so that it was ambiguous if it was a US or a Netherlands company and if its securities were equity or debt.

Very helpful explanation. Thank you!

[grabiner]

I'm wondering what will happen if (or when) China is no longer considered as an emerging market: does that mean that VWO will collapse because investors will massively sell VWO?

Does that mean that chinese stocks will be part of VEA and that VEA will surge?

ETFs trade close to the value of the underlying stocks, since they can be converted to those stocks. Thus, if investors decide to sell VWO (for whatever reason), this won't cause its price to fall. If a market is reclassified from emerging to developed, VWO will sell stocks in that market, and use the cash to buy more stocks in the remaining emerging markets, keeping the same value unless stock prices change. Conversely, VEA will buy stocks in that market, and raise the cash by selling stocks in its other markets.

The one possible effect from a country changing markets is that these transactions could result in capital gains, but the ETF structure is likely to eliminate these gains. VWO has never distributed a capital gain, even when it changed indexes and thus changed underlying countries.

[Brian1995]

I'm wondering what will happen if (or when) China is no longer considered as an emerging market: does that mean that VWO will collapse because investors will massively sell VWO?

Does that mean that chinese stocks will be part of VEA and that VEA will surge?

ETFs trade close to the value of the underlying stocks, since they can be converted to those stocks. Thus, if investors decide to sell VWO (for whatever reason), this won't cause its price to fall. If a market is reclassified from emerging to developed, VWO will sell stocks in that market, and use the cash to buy more stocks in the remaining emerging markets, keeping the same value unless stock prices change. Conversely, VEA will buy stocks in that market, and raise the cash by selling stocks in its other markets.

The one possible effect from a country changing markets is that these transactions could result in capital gains, but the ETF structure is likely to eliminate these gains. VWO has never distributed a capital gain, even when it changed indexes and thus changed underlying countries.

Thank you very much for this crystal clear explanation David. Really appreciate it.

[7eight9]

I wonder if Jack Ma thinks China is still developing (assuming he's still alive)?

I don't know what Jack Ma thinks but I do know that he is alive ...

Alibaba stock surges after Jack Ma makes first appearance in months
https://nypost.com/2021/01/20/alibaba-s ... esurfaces/