Experts: MSCI inclusion could add $400 billion to China stocks

According to experts, inclusion of China A-shares in MSCI benchmarks would give an upheaval in Asia's investment landscape, with mainland stocks set to boom even further at the cost of local peers.

Late Tuesday, US index provider MSCI said it could not include stocks listed in Shanghai and Shenzhen, known as A-shares, in its Emerging Markets Index until “a few important remaining issues related to market accessibility have been resolved.”

This move could add $400 billion to China stocks over time.

Nomura commented in a report that the decision means inclusion is just a matter of 'when' rather than 'if', and that MSCI would adopt a flexible timetable over the issue instead of sticking to its normal 12-month review cycle.

Inclusion will undoubtedly boost China's frantic stock market, which is already up 55 percent year-to-date.

Nicholas Teo, market analyst at CMC Markets, explained that exchange traded funds (ETFs) and investment funds that track MSCI indices will have to adjust and buy 'A' shares to account for their increased weight, adding to their overall funds position

There is a huge amount of money which may be committed to Chinese A-shares, Teo says, adding that "Modest estimates for an initial amount to be added come in at over $200 billion, or roughly 10-15 percent of global Emerging Markets funds."

"The ultimate inclusion of A-shares into MSCI-EM and China indices supports our bullish stance on the MSCI-China through 2017," echoed Nomura strategists.

Analysts warn, however, that the adjustment is still a long way off, as most fund managers will only buy A-shares on the date of China's actual inclusion into MSCI.

Nomura noticed that the delay could see $1.5 billion in passive funds tracking MSCI EM and MSCI China Indices pushed out.

As for the rest of Asia, some markets could suffer when A-share will be included, as their weighting in the MSCI Emerging Markets Index will naturally be reduced, resulting in some selling.

There could be outflows up to $3.8 billion in India, according to Kotak Securities. After inclusion, India's weight in the MSCI EM index may decrease to 7.13 percent from 7.49 percent, while China rises to 28.51 percent from 24.8 percent, the firm said in a report.

Daniel Wiener, CEO of Adviser Investments, notes that Taiwan and South Korea are likely to benefit.