BEIJING • China's domestic equities will join MSCI's benchmark indexes, a landmark step in the nation's integration with the global financial system.
The decision, announced by the New York-based index compiler on Tuesday, will give China's US$6.9 trillion (S$9.6 trillion) stock market a bigger role in everything from exchange-traded funds to 401(k) retirement plans. It also advances President Xi Jinping's ambitions to make the yuan a global currency.
While locally traded Chinese shares will initially comprise just 0.7 per cent of MSCI's global emerging-markets gauge, the weighting could increase over time if the country enacts further reforms.
The inclusion will be done in two steps: The first in May next year and the second, in August next year. Also on Tuesday, MSCI put off decisions on whether to reclassify Argentina as an emerging market and to demote Nigeria to standalone status. It listed Saudi Arabia on its watch list for potential classification as an emerging market.
"International investors have embraced the positive changes in the accessibility of the China A shares market over the last few years and now all conditions are set for MSCI to proceed with the first step of the inclusion," MSCI managing director and chairman of the MSCI Index Policy Committee Remy Briand said in a statement.
The development punctuates an extraordinary period during which China has sought to enter the mainstream of international finance while still maintaining a semblance of control over its markets.
Proportion of locally traded Chinese shares in MSCI's global emerging-markets gauge initially.
Since MSCI first considered adding Chinese shares to its indexes in 2014, the market has experienced an epic boom and bust, a bout of heavy-handed government intervention and - more encouragingly for foreign investors - a steady stream of initiatives to connect local exchanges to the outside world.
MSCI, which has been working directly with China's securities regulator to resolve hurdles to inclusion since at least 2015, helped bridge the gap between Beijing and reluctant global asset managers with a less ambitious proposal unveiled in March. It cut the number of eligible Chinese stocks by about half and said shares halted for more than 50 days in the past 12 months would not be eligible. All companies included in the March proposal were large-cap shares accessible to foreigners through China's cross-border exchange links with Hong Kong.
International money managers can now buy and sell more than 1,400 domestic Chinese stocks after athe uthorities opened the Shenzhen Connect in December. The first link with Shanghai started in late 2014.
Inclusion in MSCI indexes will help China attract some of the nearly US$2 trillion invested in assets tied to the firm's emerging-market gauges, MSCI chief executive officer Henry Fernandez said last month. He added that about 15 per cent of that money comes from index- tracking funds, which have become more important in recent years.
Given their tiny initial weighting, domestic Chinese shares will be dwarfed by the nation's overseas- traded stocks. The country already has the largest position in the MSCI Emerging Markets Index, thanks to Hong Kong-listed companies like Bank of China which joined the gauge years ago.
The country's dominance has only increased recently with the addition of US-traded firms, including Alibaba Group Holding.
Last year, internationally listed Chinese stocks proved a better bet than their local counterparts. The MSCI China Index has advanced 25 per cent, trouncing a 1.2 per cent gain in the Shanghai Composite Index.
Still, for many investors, China's local shares represent the future. Not only is the market massive - the second-biggest worldwide after America's - it is also home to many of the companies most aligned with China's consumer and service industries, which are seen as key drivers of the US$11 trillion economy's long-term expansion.
And while the yuan has been under pressure recently, so-called A shares in Shanghai and Shenzhen give global investors exposure to a currency that is likely to play a growing role as China expands its economic clout overseas.