Morgan Stanley Capital International (MSCI) has decided to include China’s A-shares in its MSCI Emerging Markets Index (MSCI EM Index), which – together with the firm’s other indices – is often used as a benchmark to measure portfolio performance. The index comprises about 10% of global market caps. MSCI will include 222 A-share stocks, which only accounts for 0.73% of the weighting of the EM Index. But the weighting could increase further over time if China implements more changes in its market reform. The inclusion will take place in two steps, first in May 2018, and second in August 2018. The inclusion could pull more than USD400 billion of funds from asset managers, pension funds and insurers into China’s equity markets over the next decade, according to analysts. An inclusion will automatically result in capital inflows to China’s domestic equity market, as all passive index funds and ETFs that track the MSCI EM index will be forced to add those shares to their portfolios.

The inclusion is a milestone in the opening up of the Chinese equity market to the world. Following reviews in 2014, 2015 and 2016, MSCI had rejected the inclusion, due to the A-shares limited market accessibility to global investors and restrictions on repatriation of capital. The Chinese authority addressed these issues by increasing quotas on foreign ownership of A-shares and relaxing rules on fund remittance. MSCI then raised new worries associated with the widespread, extended trading suspension of many A shares, which took place in China’s 2016 stock market rout. China then responded by changing regulatory rules and limiting trading halts to a maximum of three months, the South China Morning Post.

“International investors have embraced the positive changes in the accessibility of the China A shares market over the last few years and now all conditions are set for MSCI to proceed with the first step of the inclusion,” Remy Briand, MSCI Managing Director and Chairman of the MSCI Index Policy Committee, said in a statement. The MSCI inclusion “will provide a modest boost to sentiment and flows into China,” said David Loevinger, a former China specialist at the U.S. Treasury who is now an analyst at fund manager TCW Group in Los Angeles. “More importantly, it strengthens Chinese reformers that want to open China’s markets. The small index weight looks like a compromise between those asset managers that wanted China in and out.” International money managers can now buy and sell more than 1,400 domestic Chinese stocks after authorities opened the Shenzhen Connect in December, about six months after last year’s MSCI rejection. The first link with Shanghai started in late 2014. China already has the largest position in the MSCI Emerging Markets Index, thanks to Hong Kong-listed stocks and others listed on overseas stock exchanges. “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 Spokesman Zhang Xiaojun of the China Securities Regulatory Commission (CSRC).