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Market watchers are positive on the inclusion

MARKET watchers said the MSCI decision to include 222 Chinese A-shares into its benchmark global index is symbolic as a mark of China's capital market opening up, but the short term impacts are more sentimental with limited funds expected to flow into the market.

Charles Li, chief executive of Hong Kong Exchanges and Clearing Co and a main driver behind the Hong Kong stock connect program, compares the progress to the yuan's inclusion into the official currency basket of International Monetary Fund in 2015.

"China is the world's second largest economy, and the inclusion is a route must taken for China and the world to work with each other," Li told the Lujiazui Forum. "The decision was a small step for the market but a giant leap for market opening-up."

He said the inclusion marks integration of two different market systems with the help of stock connect programs between Shanghai, Shenzhen, and Hong Kong that were set up in the past two years.

"Today China is no longer following suits but has developed infrastructure different from others. The international system and China won't change for each other, but still the two systems must merge."

He said the stock connect programs serve as a "translator and adapter" between different stock market mechanisms.

"The MSCI has recognized it and use the programs as a breakthrough," Li said. "It marks a start for the overall introduction of the A-shares into the global stock market."

David Leung, head of wealth management at Standard Chartered Bank China, said the inclusion marks international recognition to A-share market liquidity and transparency, and will bring capital inflow over the long term.

"The increase of institutional investors will change market structure and risk appetite, which will reduce market volatility to some extent," Leung said. "Outflow under capital account would ease, helping stabilizing exchange rate. The inclusion will also help internationalization of China's capital market and lift pricing power and international influence of the China's financial sector."

But he added that the short term impact on domestic liquidity is limited since the actual process will start in June next year, and the A-shares took only a small weight in the index.

Analysts have expected the inclusion to bring at most between 60 to 70 billion yuan to the domestic stock market, a marginal amount compared with the nearly 50 trillion yuan market value of listed companies and around 300 billion yuan daily trading volume on the A-share market.

Raymond Ma, portfolio manager of Fidelity International, who has included A-shares into his two funds, said the inclusion would narrow the valuation gaps between A-shares and their lower-valued counterparts of Hong Kong-listed H-shares.

He said blue chips and large cap stocks in the A-share market with stable dividend policies are expected to outperform.

"I have been investing in A-shares long before the proposals of A-share inclusion," Ma said. "The A-share exposure of my two funds has been expanding over the years in light of improved fundamentals and liquidity of A-share market. I will continue to focus on A-share companies with strong growth prospects and cash flow generating capability."

Hong Hao, chief strategist of BOCOM International, said the slightly higher weight of included shares an increase to 222 from originally proposed 169 would bring positive reactions on the market especially towards the larger caps.

But challenges remain as international fund managers may find it hard to adapt to the A-share trading environment and decide not to include A-shares as they track MSCI indices.

He also noted that global trade growth has peaked according to research models, resulting in moderating growth ahead for emerging market economic growth and stock market performance.


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