MSCI move expected to spark inflows from foreign investors

China's stock market is expected to see a new inflow of global investment after the world's top index provider MSCI Inc announced the final list of Chinese shares to be included in its benchmark equity indices.

Some 234 domestically listed Chinese companies, ranging from China's biggest liquor maker Kweichow Moutai to banking giant Industrial and Commercial Bank of China, will be added to the MSCI system on June 1.

The inclusion of China's A shares, yuan-denominated equities traded on mainland stock exchanges, in the MSCI indices will give foreign investors greater exposure to the world's second-largest stock market and also marks the further integration of China's capital market into the global financial system, analysts said.

MSCI, the New York-based index provider, said on Monday that the inclusion will be a two-step process with the initial inclusion of 234 Chinese A shares, making them represent around 0.39 percent of the weighting on the MSCI Emerging Markets Index.

The second step will take place in September when the list of Chinese shares to be added to the MSCI will be further expanded and it will likely bring the representation of A shares to around 0.8 percent of the MSCI emerging market index.

The inclusion of A shares means that foreign investors such as exchange-traded funds, pension plans and endowment funds will need to allocate the added Chinese stocks if they want to closely track the MSCI benchmark gauges.

UBS Securities estimated that the inclusion could lead to $18.4 billion of fund inflows into the A-share market.

"Consumer discretionary, consumer staples and healthcare are likely to benefit more from foreign inflows, as we find that foreign investors have persistently favored these sectors in their positioning," said Gao Ting, head of China Strategy at UBS Securities.

"The inclusion could lift sentiment in the current weak market environment, as the recent accelerating Stock Connect northbound flow signifies increasing market attractiveness to foreign investors," he said.

The Chinese securities regulator has improved market access to foreign investors and addressed their liquidity concerns by increasing trading quotas and strengthening regulations on the trading suspension of listed companies. These efforts have helped A shares gain entry to the MSCI system following three failed attempts.

Raymond Ma, portfolio manager at Fidelity International, said the MSCI inclusion will help the A-share market to improve liquidity and see it increasingly driven by fundamentals rather than short-term market noise.

"With the A-share market primarily dominated by retail investors currently, market movements tend to be driven by short-term market noise and herding behavior. However, as the proportion of institutional investors increases over time, we expect this to change," he said.