MSCI has announced that it will include selected domestic Chinese shares on its Emerging Markets Index and ACWI Index.
The decision to include China A shares is part of MSCI's 2017 Markets Classification Review, and comes after three consecutive years of rejection by the global indexer.
An announcement by MSCI this morning said: "MSCI plans to add 222 China A Large Cap stocks, representing on a pro forma basis approximately 0.73 per cent of the weight of the MSCI Emerging Markets Index at a 5 per cent partial Inclusion Factor."
The changes to the index will take effect from June 2018.
Concerns in past years have been focused on excessive trading suspensions and repatriation limits for foreign investors.
"A two-step inclusion process will be used to account for the existing daily trading limits on Stock Connect," said MSCI.
"The first inclusion step would coincide with the May 2018 Semi-Annual Index Review followed by the second step which would take place as part of the August 2018 Quarterly Index review."
Speaking to InvestorDaily ahead of the decision, UBS Asset Management head of investment strategy Tracey McNaughton said MSCI adjusted its criteria to make China's inclusion easier at the fourth attempt.
"In previous attempts they were looking at a far wider number of companies, but this time they're limiting it to the largest 222," Ms McNaughton said.
The 222 companies to be included on the MSCI Emerging Markets Index are already available to foreign investors on the Shanghai-Hong Kong Stock Connect and the Shenzhen-Hong Kong Stock Connect, she said.
"It's in MSCI's interest to only include the most liquid so they can sell their product. And so at this stage they've decided to make it a very narrow basket of only the largest companies."
Today's decision will be part of a gradual decade-long process to include the entire Chinese domestic share market on the MSCI index, Ms McNaughton said.
"Ultimately China will be 40 per cent of the MSCI Emerging Markets Index. And so if you're going to have a single country having that big a weight then you've really got to make sure that investors can buy and sell the names in the index," she said.
Fund managers and index providers will have 12 months to adjust their portfolios, and with only $2 billion of inflows into China as a result of the changes the adjustments will be "minimal", Ms McNaughton said.
MSCI's decision to include China A shares in its index was largely priced into the Shanghai and Shenzhen markets, with both up 6.5 per cent in the past month, she said.
A fourth rejection would have been a "big shock" and would have been likely to provoke a negative market reaction, Ms McNaughton said.
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