China's entry to MSCI indices is 'slow motion game changer'

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US index provider MSCI said on Wednesday Hong Kong time it would add a selection of China's so-called "A" shares to its Emerging Markets Index .MSCIEF after having rejected them for three years running.

The Shanghai and Shenzhen stock markets opened higher after New York's MSCI agreed to include 222 large capitalisation Chinese stocks in its MSCI Emerging Markets Index, representing 0.73 percent of the index.

Many of China's more well-known private groups like Alibaba and Baidu that already trade on stock markets outside of the mainland, such as in NY and Hong Kong, would already be accessible to US investors through the MSCI index.

iShares MSCI Emerging Markets ETF, formerly iShares MSCI Emerging Markets Index Fund (the Fund), seeks investment results that correspond generally to the price and yield performance of publicly traded equity securities in global emerging markets, as measured by the MSCI Emerging Markets Index (the Index).

The MSCI inclusion is both a challenge and an opportunity for China's capital market and China will continue the reform to make it more market-oriented, internationalized, and governed by law and help it grow steadily, according to the China Securities Regulatory Commission (CSRC).

While China celebrated, Argentinian investors reeled as the index compiler defied predictions that the country would be upgraded to emerging-market status, keeping it in its frontier group for at least another year. The newly adopted methodology is created to address these issues and make inclusion more likely, analysts said.

Foreign investors now own less than 1.5 percent of China-A share (USD 6.8 trillion market) compared to about 22 percent in case of India.

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.

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"Over the past few years, authorities in China have embarked on an ambitious agenda for the liberalisation of capital markets in the mainland, which is now reaping benefits". Historically it has been harder to include A-shares in indices because only Chinese domestic investors and "Qualified Foreign Institutional Investors" can trade A-shares. The move is also expected to give a boost to stocks region wide.

Chinese stocks will be included for the first time in a leading US index of emerging market shares.

"The inclusion will also help internationalization of China's capital market and lift pricing power and global influence of the China's financial sector".

In three previous index reviews, the benchmarker has held off on adding Chinese shares because of worries about limited access for foreign investors to the country's markets.

The company is an A-share, and the fifth-largest company by market capitalization trading on the Shanghai Stock Exchange.

"In the case of a "No" decision: The A-share market might first react with a minor decline of 1.0 percent", Morgan Stanley said in a recent report.

"With approximately $2 trillion in active and passively managed money tracking it, MSCI's EM Index is a significant dictator of equity market flows".