The move is expected to draw in billions of fresh global capital into the Chinese mainland stock market.

Investors around the world are likely to pump more money into mainland China A-shares after prominent index provider group MSCI said it will boost the “inclusion factor” of these equities to 20 per cent from 5 per cent in a three-step process. The move had been expected in industry commentaries over recent days.

The proposal to increase the weight of China A shares “garnered overwhelming support from investors”, MSCI said.

MSCI’s indices are used to many investment groups to craft their asset allocations and change how they set their market exposures. Some institutional investors can only put money into specific markets, under their own rules, if an index includes such assets. MSCI’s move should, for example, widen the freedom for pension funds and life insurers to increase mainland China exposures.

While China has pushed to restrict some capital outflows from the emerging market economy in recent months, with tax changes that started from January being the latest moves, it is also keen to encourage more inward investment. Already, the Hong Kong-Shanghai and the Hong Kong-Shenzhen Stock Connect equity market link-ups have driven transactions. The MSCI move, announced late on Thursday in the US, is expected to propel more inflow into China.

“Stock Connect has proven to be a robust channel to access A shares. The successful implementation of the initial 5 per cent inclusion of China A shares has been a positive experience for international institutional investors and has fostered their appetite to increase further their exposure to the mainland China equity market,” Remy Briand, MSCI Managing Director and Chairman of the MSCI Index Policy Committee, said.

“The strong commitment by the Chinese regulators to continue to improve market accessibility, evidenced by, among other things, the significant reduction in trading suspensions in recent months, is another critical factor that has won the support of international institutional investors,” Briand said.

 Investors told MSCI that they prefer to see the weight of the China A Large Cap shares increased in three steps rather than in two steps, as originally proposed, to allow the changes to take place more smoothly.

“The MSCI weightings increase should result in significant flows into A-shares, as we witnessed last year with China A going to 0.71 per cent; a move to 2.82 per cent in August 2019, followed by 3.36 per cent in May 2020 (with the addition of China A Mid Cap securities) is bound to be even more impactful," Yannan Chenye, head of China equity research and portfolio manager, Harvest Global Investments, said.

As a result of this, as well as other China opening-up policies, such as foreign ownership via QFII expansion, we believe it will be a record year for potential inflows into the A-share market this year. Up to $100 billion of foreign inflow is expected, up from $45 billion in 2018. This represents over 3.5 per centof the total free float market cap," Chenye said.

MSCI said a “significant proportion of investors” also said China A Mid Cap shares should be included in the MSCI Indexes jointly with the weight increase in Large Cap shares to allow for a smoother implementation. Finally, the proposal to add ChiNext to the list of eligible stock exchange segments for the MSCI Global Investable Market Indexes received wide acceptance, it said.

In the first step, the index provider said it will increase the index inclusion factor of shares from 5 to 10 per cent, then 15 per cent and then to 20 per cent in May, August and November this year, as applying to different segments of the market.

There is great potential for investors to boost weightings to Chinese equities, Harvest’s Chenye said.

“Global investors are still very underweight China and, if the market continues to perform well, they will all have to rush to increase their exposure at the same time. We expect international capital to have a major effect on the A-share market and its valuation metrics over the years ahead. Foreign investors’ capital size and strength is significant and, when mobilized, it will have a major influence on domestic funds,” Chenye continued.

“International capital is likely to focus on the stocks with longer-term potential and this focus will drive up valuations of the better-quality companies, leading to improvements in corporate governance and efficiency amongst Chinese firms,” Chenye added.

Aberdeen Standard Investments is upbeat about mainland China equities in the medium term even though the market, along with many others, fell last year.

"This is an inefficient market, after all, where 80 per cent of turnover emanates from local retail investors more easily swayed by the latest headlines than the earnings prospects of A-share companies.Investors were bombarded with negative news last year about China’s slowing economic growth, rising bankruptcies and US trade tariffs. It undermined confidence and put the brakes on businesses’ spending plans," he said in a note about the MSCI changes.

"But such aversion was short-sighted.We believe there are compelling reasons for international investors to view this market more favourably, particularly over the longer run," he added.