Feb 13): MSCI Inc is cutting dozens of Chinese companies from its global benchmarks, after many stocks tumbled as the market erased trillions of dollars in value.

The index provider is removing 66 companies from its MSCI China Index in its latest quarterly review, the highest tally in at least two years. The changes, effective as of the close on Feb 29, also apply to the MSCI All Country World Index. Stocks to be cut include property developers Gemdale Corp and Greentown China Holdings Ltd, as well as China Southern Airlines Co and Ping An Healthcare and Technology Co.

The removals come as China’s weighting in global portfolios slumps amid worries about its struggling property sector and weak consumption, and as alternatives such as India become more prominent. In a sign of the deep pessimism about the China and Hong Kong stock markets, equity rallies spurred by a slew of policy support measures last week faded within a few sessions ahead of the Lunar New Year break.

“It highlights the issue of negative flows for Chinese stocks as investors reduce exposure to the country, in large part due to recent weak fundamentals, but also fears of ongoing financial instability, regulatory uncertainty, and — most of all — country risk,” said Kyle Rodda, senior market analyst at Capital.Com Inc.

“Some investors may also be forced to liquidate because of losses already incurred or because certain companies no longer fall within investment mandates,” he added.

Three stocks will be deleted from the Hong Kong index as well: Budweiser Brewing Co, APAC Ltd, New World Development Co and Xinyi Glass Holdings Ltd.

Index-hugging funds will have to purge these stocks from their portfolios. There’s at least US$5.9 billion (RM27.91 billion) in exchange-traded funds tracking the MSCI China Index, the largest of which is the US-listed iShares MSCI China ETF, according to Bloomberg-compiled data.

The news wasn’t all about cuts, though. Five components will be added to the MSCI China Index, including electrical-appliance maker Midea Group Co and skin-treatment company Giant Biogene Holding Co.

Still, the high number of deletions could weigh as Hong Kong resumes trading on Wednesday. MSCI takes a number of factors into account for including stocks in its standard indices including market capitalisation, free float and extreme price increases.

“The deletion list of Chinese companies, spanning across a wide range of sectors from technology, property and retail to health care, solidifies the perception of systemic-based concerns over the world’s second-largest economy,” said Hebe Chen, market analyst at IG Markets Ltd.