Global institutional benchmark provider MSCI yesterday decided to include 222 of China's yuan-denominated A shares in two of its indexes.
The move follows three years of rejections.
Market watchers say the decision is symbolic of the opening-up of China's capital market, but the short-term impact would be slight as limited funds expected to flow into the domestic market.
From June next year, the shares will be included in MSCI's Emerging Markets Index and All Country World Index. The shares, mainly large caps traded under stock connect programs with Hong Kong, took a weight of 0.73 percent in the EM index, to which over US.5 trillion in assets is benchmarked.
MSCI said the decision resulted from greater accessibility to China's yuan-denominated A-share market under stock connect programs and easier processes to set up index-linked investment vehicles under the loosening of pre-approval requirements.
The inclusion received "broad support from international institutional investors" the company had consulted, MSCI said.
Since last year's MSCI rejection, Chinese financial regulators have added the Shenzhen-Hong Kong Stock Connect program to the existing Shanghai-Hong Kong link.
The China Securities Regulatory Commission also acts against arbitrary trading suspensions to enhance market liquidity.
MSCI said the pool of included A shares may expand if China further improves market liquidity and facilitates cross-border capital flow.
The CSRC lauded MSCI for its decision while pledging deeper market reform.
"The MSCI inclusion responds to the needs of international investors and shows investors' confidence in the Chinese economy and financial market. We always welcome this," said CSRC spokesman Zhang Xiaojun.
"The MSCI inclusion is both a challenge and an opportunity for China's capital market. We will continue the reform to make it more market-oriented, internationalized and governed by law and help it grow steadily."
He said there would be new rules and regulations for overseas investors to invest in A shares and products tracking the MSCI indexes.
Currently, all products derived from A shares need to be approved by the CSRC before they can be sold overseas.
Charles Li, chief executive of Hong Kong Exchanges & Clearing Co and a main driver behind the Hong Kong stock connect schemes, compared the MSCI move to the yuan's inclusion in the official currency basket of International Monetary Fund in 2015.
"China is the world's second-largest economy, and the inclusion is a route that must be taken for China and the world to work with each other," Li told the Lujiazui Forum in Shanghai yesterday.
"The decision was a small step for the market but a giant leap for market opening-up."
David Leung, head of wealth management at Standard Chartered Bank China, said the inclusion marked international recognition of 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 the pricing power and international influence of China's financial sector."
But he said the short-term impact on domestic liquidity will be limited since the actual process will start in June next year and A shares take only a small weight in the indexes.
Analysts expect the inclusion to bring 60-70 billion yuan (US-10 billion) to the domestic market, 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.