Chinese Stock Collapses 98% in Hours After MSCI Flip-Flops: How Index Providers Saddle US Pension Funds with Stock Scams

Chinese Stock Collapses 98% in Hours After MSCI Flip-Flops: How Index Providers Saddle US Pension Funds with Stock Scams by Wolf Richter for Wolf Street

Despite my assurances that “Nothing Goes to Heck in a Straight Line,” a Chinese stock just did.

I’m infamous for saying that “Nothing Goes to Heck in a Straight Line.” This piece of immortal wisdom even made it onto our official beer and iced-tea mugs. But today, I was proven wrong. A Chinese stock just went to heck in a straight line.

ArtGo Holdings, a Chinese company that mainly quarries marble and processes it into blocks and polished slab and that has recently been trying to expand into Chinese real estate with funds raised by issuing more shares, is now infamous because its shares, traded in Hong Kong since 2013, became this year one of the best-performing stocks in the world, with a 3,800% surge, from 0.38 Hong Kong dollars on January 2, 2019, to HK$14.8 at the close on Wednesday, giving it a market capitalization of HK$45 billion ($5.6 billion). And today the stock collapsed by 98% (red line to heck) to HK$0.30 before trading was halted a tad too late:

The surge of the stock from near nothing to $5.6 billion came as two top index providers – FTSE Russell and MSCI – decided to include the stock in their indices. And the collapse came when MSCI backtracked last night.

On November 7, MSCI announced that it would include ArgGo into its benchmark indices affective November 27. Yesterday evening, MSCI U-turned and  announced these crushing words:

Following further analysis and feedback from market participants on investability, contrary to what was announced on November 7, 2019, MSCI will not add ArtGo Holdings to the MSCI Indexes as part of the November 2019 Semi-Annual Index Review.

MSCI will continue monitoring ArtGo Holdings. The security will not be added to the MSCI Indexes until further notice.

Even rumors of an inclusion into the benchmark indices by MSCI or other index providers can drive up share prices, particularly of these types of tiny Chinese stocks because funds that track these indices – including funds in the US Federal Employees Retirement System and other public and private US pension funds – end up having to buy the shares in order to track the benchmark indices.

Speculators front-run the inclusion of stocks into benchmark indices. This front-running drives up the share price and market capitalization. When the index provider then makes the announcement of a coming inclusion, funds that track that index start buying. Many indices use market capitalization as a criterion for inclusion, and the more this market cap gets driven up, the more indices include the shares, which drives up market cap even further. It creates a stock built on vapor.

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Wolf Richter

In his cynical, tongue-in-cheek manner, he muses on WOLF STREET about economic, business, and financial issues, Wall Street shenanigans, complex entanglements, and other things, debacles, and opportunities that catch his eye in the US, Europe, Japan, and occasionally China. WOLF STREET is the successor to his first platform… TP-Title-7-small-200px …whose ghastly name he finally abandoned in July 2014. Here’s the story on that. Wolf lives in San Francisco. He has over twenty years of C-level operations experience, including turnarounds and a VC-funded startup. He earned his BA and MBA in Texas and his MA in Oklahoma, worked in both states for years, including a decade as General Manager and COO of a large Ford dealership and its subsidiaries. But one day, he quit and went to France for seven weeks to open himself up to new possibilities, which degenerated into a life-altering three-year journey across 100 countries on all continents, much of it overland. And it almost swallowed him up.