MSCI move shows confidence in market

In a thumbs-up for China's financial market opening-up, evidenced by improving stock market accessibility, global index provider MSCI was due to increase the weighting of Chinese shares in its indexes from Tuesday.

The inclusion factor for large-cap A shares was to be raised from 15 percent to 20 percent, while mid-cap A shares, including Nasdaq-style ChiN-ext shares, with a 20 percent inclusion factor were also to be added.

The inclusion factor is used to represent the proportion of the market capitalization of China A shares included in the pro forma MSCI China Index. The move marks the completion of a three-step plan by the index compiler to increase the weight of A shares in the MSCI indexes, which has already seen it raise the inclusion factor twice.

This means the MSCI Emerging Markets Index will now comprise 253 large-cap and 168 mid-cap Chinese A shares including 27 ChiNext shares, representing a weight of 3.3 percent in the proforma index, as compared with about 0.7 percent at the beginning of the year - an indication of international institutional investors' increasing enthusiasm for China's equity market.

One obvious benefit from the weighting increase will be capital inflows into the new A-share constituents, as passively managed index tracking overseas funds have to adjust their portfolios to synchronize with every change in the MSCI indexes. This may in a way bolster a market that has already remained bearish for more than four years.

The Chinese mainland equity market has attracted more than 240 billion yuan ($34.12 billion) of capital from overseas since the beginning of this year, a strong indication of global investors' rising confidence, Li Chao, vice-chairman of the China Securities Regulatory Commission, said during a forum in Guangzhou over the weekend.

More important, China has stepped up its efforts to further open up its financial market. In September, it entirely removed the equity investment quota limits for so-called qualified foreign institutional investors, making it more convenient for overseas investors to invest in the Chinese market.

All this bodes well for the further opening up and development of China's financial market, which may include improvements in settlement and an adjustment to trading holidays as well as measures to better address foreign investors' rising needs for risk management. Progress in these fields will continue to make China a magnet of international capital.