BlackRock Boosts China ADR Holdings by 500% After MSCI Inclusion

  • Firm quadruples Alibaba stake, increases Baidu holding sixfold
  • Money manager's net purchases of 14 stocks total $3.6 billion

BlackRock Inc. increased its holding of shares in Chinese companies trading in the U.S by 500 percent following a decision by MSCI Inc. to add the companies to indexes tracked by ETF providers.

American depositary receipts of companies including Alibaba Group Holding Ltd., Baidu Inc. and Inc. were purchased by BlackRock, which manages the biggest exchange-traded fund tracking the MSCI Emerging Markets Index.

The firm increased its combined holdings in the 14 ADRs to $4.3 billion, according to its latest disclosures, mostly from Dec. 31 or later and reflecting fourth-quarter trades. The net purchases, now worth about $3.6 billion, increased BlackRock’s holdings to 1.3 percent of the companies’ market values, up from 0.2 percent, according to data compiled by Bloomberg. 

MSCI said in November it would include 14 U.S.-traded Chinese equities in some of its largest indexes as part of its semi-annual review. BlackRock’s purchases underscore the increasing influence on global asset allocation by index providers like MSCI, whose benchmarks are followed by investors with $9.5 trillion under management. It also highlights China’s desire to have its domestic stocks join the MSCI indexes in an attempt to attract capital and lift its status in global markets.

Powerful Institution

“MSCI is arguably one of the most powerful financial institutions globally, as they provide the rules fund managers have to abide by,” Brendan Ahern, managing director at Krane Fund Advisors, said by phone. “For China, it is a matter of respect and prestige and is another step in its attempt to attract foreign capital.”

The move to include the ADRs in indexes was part of MSCI’s shift to broaden the coverage of the gauges as companies trade away from their home markets. The changes took effect after trading closed Nov. 30.

The New York-based money manager more than quadrupled its stake in Alibaba, China’s largest online retailer, with purchases now worth $1.3 billion, and boosted its holding in search engine Baidu almost sixfold to about $1 billion. Blackrock’s purchases of ADRs of the country’s biggest real-estate information website, SouFun Holdings Ltd., are worth about $25 million, pushing the firm’s stake in the company to 1.1 percent.

“An ETF provider has to track whatever the underlying indexes are doing, and if there is an inclusion of an asset, the ETF’s goal is try to replicate that,” Mohit Bajaj, director of ETF trading solutions at WallachBeth Capital, said by phone from New York. “This might seem to be a big increase, but it makes sense when you keep in mind that BlackRock is the top ETF provider out there, and some of these names are trading a couple of thousands of shares a day, and BlackRock has to buy those names for a number of its funds.”

Other ETF managers, including Deutsche Bank AG, also increased their holdings in some of the companies, but by much smaller sums.

The inclusion of the companies in the MSCI indexes appeared to have had limited impact on the ADRs’ prices. On Nov. 13, the day after the index additions were announced, 11 fell and three rose. When changes took effect on Nov. 30, 11 gained and three slumped. Since then, 10 are down and four are up.

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