Analyst View - MSCI adds domestic Chinese stocks to Emerging Markets Index

Scene at a medical intermediary company in Hong Kong's Sheung Shui district that provides prenatal testing to determine the gender of fetuses for couples in China

The acceptance of some Chinese "A" shares into MSCI's Emerging Markets Index was seen as a symbolic win for Beijing after three failed attempts.

"Despite the reduced A-shares index weighting of 0.73 percent, today's announcement represents a defining moment for the Chinese stock market".

The senior official said financial authorities will closely monitor the local stock markets.

"China has been given a big tick in the box from the worldwide investment community and the MSCI", according to Sean Taylor, Asia Pacific chief investment officer at Deutsche Asset Management.

"Over the long term, assuming further liberalisation and regulatory reform of the mainland stock markets, the depth of China's A-share market could mean China gains substantial weight within those broader indices".

"MSCI will reflect a higher representation of China A shares in the MSCI Emerging Markets Index when there is further alignment with Global market accessibility standards, sustained accessibility within Stock Connect is proven, and worldwide institutional investors gain further experience in the market".

China's stocks took a major step toward global acceptance on Wednesday, finally winning a long campaign for inclusion in a leading emerging markets benchmark, in what was seen as a milestone for global investing.

"MSCI's decision to include A shares in its Emerging Markets Index is a pivotal moment for global investment in China's capital markets".

She believes investors and asset managers need to speed up the development of their research capabilities and infrastructure operations to adequately handle the world's second largest equity market.

For example, Chinese regulators still insist on pre-approval for overseas financial products linked to indices with Chinese mainland shares in them. The Shanghai Composite Index traded Wednesday at 3156.21 up 0.52%.

Asia also ended mostly lower, with Hong Kong's Hang Seng down 0.6 percent and Japan's Nikkei down 0.5 percent but China's Shanghai gained 0.5 percent on addition of China A shares in MSCI Emerging Markets Index. While the near-term impact of MSCI's decision on the ETFs and index funds tracking affected benchmarks will be minimal, it's likely that A-shares will account for a growing portion of these funds' portfolios down the road.

An estimated $1.6 trillion in assets around the world were benchmarked to the MSCI Emerging Markets Index as of the end of June 2016.

A lack of capital liberalisation has served to keep mainland Chinese equities, or A-shares, relatively insulated from global capital flows. Exposure may be limited, but a repeat performance of 2015's China stock-market crash could have huge ramifications.

The company has been in discussions with Chinese regulators and global investors for almost four years on whether to add yuan-denominated shares listed in Shanghai and Shenzhen to the benchmark.

MSCI first began its review on whether to include A-shares four years ago, but each year since it declined to include them because of concerns around how easily foreign investors could access the market.

MSCI's indexes are closely followed by fund managers and the move could draw more foreign investment to Chinese firms, though analysts said they didn't expect an immediate flood of money because the two-phase implementation is still a year away.

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