NEW YORK • Global index provider MSCI is quadrupling the weighting of Chinese mainland shares in its global benchmarks later this year, a move it said might draw more than US$80 billion (S$108 billion) of fresh foreign inflows to the world's second-biggest economy.
The weighting increase, announced on Thursday, may be a milestone in Beijing's efforts to internationalise the yuan.
MSCI also said that it will add Chinese mid-cap stocks to its emerging market benchmark in November, boosting the number of Chinese constituents.
MSCI's milestone China inclusion last year was a positive experience for global investors, and "has fostered their appetite to increase further their exposure to the mainland China equity market", MSCI managing director Remy Briand said.
The decision, largely within expectations, marks a win for Beijing, which has stepped up efforts to woo foreign investment in the face of a slowing economy and prolonged trade friction with the United States.
"Inclusion should boost investor sentiment and, over the long term, flows into China," Ms Caroline Yu Maurer, head of Greater China equities at BNP Paribas Asset Management, said in a note.
Conservatively, we forecast 400 billion yuan (S$81 billion) of foreign inflows into the A-shares market this year due to the further inclusion. We also expect an increase in demand from active as well as passive flows, and... similar trends from asset managers and asset owners based in Singapore.
MR TONY LEWIS, HSBC Singapore head of security services.
"It also helps advance President Xi Jinping's ambitions to make the yuan a global currency," she said.
The index provider will increase the inclusion factor of Chinese large-cap stocks to 20 per cent from the current 5 percent in three steps, with increments of 5 per cent in May, August and November.
On completion of the three-step implementation, the weighting of Chinese stocks in the MSCI Emerging Market Index will jump to 3.3 per cent, from roughly 0.7 per cent currently.
Mr Tony Lewis, HSBC Singapore head of security services, said the move is a logical step in boosting foreign participation in the world's second-largest equity market.
"Conservatively, we forecast 400 billion yuan (S$81 billion) of foreign inflows into the A-shares market this year due to the further inclusion. We also expect an increase in demand from active as well as passive flows, and... similar trends from asset managers and asset owners based in Singapore," he said.
Future weight increases for Chinese shares will depend on China further improving market accessibility for overseas investors, who are concerned over limited hedging tools and a few operational issues, said MSCI.
The MSCI announcement could give a lift to a stock market that has jumped about 20 per cent so far this year, partly on hopes that Beijing and Washington will soon reach a deal resolving their trade dispute.
Rival index publishers FTSE Russell and S&P Dow Jones Indices will both start adding yuan-denominated Chinese shares to their global benchmarks this year as Beijing steps up efforts to integrate China's capital markets into the global financial system.
Mr Fang Xinghai, deputy head of China's securities regulator, predicted foreign capital inflows into Chinese stocks this year will double to about 600 billion yuan.
Mr Brendan Ahern, chief investment officer at Krane Funds Advisors in New York, which manages the KraneShares Bosera MSCI China A ETF (KBA), said: "I am almost crying. We have built the (ETF) in anticipation of this event. We anticipated that this inclusion would take place and built an ETF vehicle that investors could proactively take advantage of."
KBA is up 24.6 per cent this year.