GDP Weighting

July 17, 2007

Matt's comments the other day, together with the "alternative weighting" panel we're recording today for Journal of Indexes made me think about some things, like China.

First of all, Matt mentions GDP weighting in the context of MSCI using it to help people around the "Japan problem" in EAFE before the bust in Japan.  He suggests that GDP and other economically-valued weightings might be interesting - and he points to China's vast underrepresentation on cap weighting vs. GDP weighting.  

The great irony here is that any attempt to move significantly toward a GDP-weighted China would result in the OPPOSITE of what the alternative Japan reweighting was meant to do for institutional would almost certainly result in a liquidity squeeze that would make the daily casino-like movement of the China A Shares (the internal Chinese markets often trade at huge premiums to the externally available stocks of the same companies).

As a brief aside, China B Shares are the mainland listed shares available to foreign investors.  "H-Class Shares" are Hong Kong listed mainland companies and "red chips" are Hong Kong incorporated mainland companies. 

In short, putting a huge demand on the limited array of company stocks that trade in representation to the overall Chinese economy would most likely force the prices of those stocks to stratospheric levels.  And this is something that sophisticated institutional investors might be unlikely to do, which points to the perhaps more rational pricing we've seen in the B Shares despite the bubbly sentiment we've seen in the U.S. for Chinese stocks.

Sounds like it's time for an interview with Burton Malkiel, who's coming out with a book on China investing this fall. 



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