Meitu fiasco invites a watchdog look

Editorial | 18 May 2017

What's wrong with global index provider MSCI?

A day after absorbing mainland selfie app maker Meitu into the MSCI China Index, it's now telling the markets that it was all a mistake, and that Meitu would not be included in the index next month, as previously announced.

That's simply shocking.

If MSCI always prides itself on its prestige as an index provider for global traders, its reversal is making it look silly and, worse still - irresponsible - since it must know that many investment decisions around the world are linked to MSCI indexes.

The news that Xiamen-based Meitu, whose most famous product is an app that enables users to doctor selfies to make one wrinkle-free and look beautiful, would be added to MSCI shoved up the stock to as high as HK$10.90 during Tuesday trading, before closing at HK$10.78.

The stock, which was floated in the SAR only in December, tumbled up to 10 percent yesterday prior to closing at HK$9.80 - wiping HK$4.15 billion off its market value - upon MSCI's shocking announcement.

One can imagine numerous investors were immediately trapped by the violent swing spurred by the U-turn.

That's a coarse blunder that could have been avoided readily by the organization. If this misleading statement by MSCI had occurred in the United States it would have resulted in lawsuits, and that would have surprised no one.

What happened?

MSCI said it was related to Meitu's free-flow shares.

Since Meitu's listing debut here, its market capitalization had increased exponentially - standing at HK$45.67 billion yesterday.

But, only about 17 percent of Meitu's more than 4.2 billion issued shares are free-flowing, due to lock-in period trading restrictions.

The MSCI China Index has 149 large and mid-cap constituents with a median market capitalization of HK$23.35 billion, according to its website.

Unfortunately, MSCI raised more questions as it tried to justify the U-turn on Meitu, which had been almost unheard of in the financial world. All data - including the restrictions during the lock-in period - was public information and available to all analysts.

At best, the blunder was a careless mistake by someone supposedly professional. However, even so, it should have never been allowed to happen, since the decision to include or remove a stock from the index couldn't have been an impromptu act, but the result of thorough studies.

I trust its decisions to remove Cathay Pacific from the MSCI Hong Kong Index, and add Fairwood Holdings to MSCI HK-Small Cap Index weren't taken lightly.

If the index fiasco surrounding Meitu was due to individual negligence, it would raise the further question: how did it manage to escape the attention of senior managers? The incident reflected poorly on the system of internal monitoring - if such a system is actually in place.

At worst, could there be foul play involved in what appeared to be a blunder? It's not uncommon in the financial world for unscrupulous players to sell on fake good news.

No matter what, Securities and Futures Commission chairman Carlson Tong Ka-shing ought to investigate the incident, even if only to assure investors that Hong Kong has solid safeguards against market irregularities.

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