(Yicai Global) Sept. 27 -- Foreign capital flows into China's yuan-denominated domestic shares seems irreversible as the world's second-largest stock index compiler unveiled plans to include A-shares in key benchmarks.

Better known as FTSE Russell, London-based FTSE International made the announcement today, the day after MSCI, the No.1 compiler, said it may expand its A-share inclusion factor to 20 percent from 5 percent following a review next year. MSCI also proposed including the Shenzhen Stock Exchange's Growth Enterprise Market, or GEM, as a qualifying exchange. It will likely also consider listing mid-cap stocks before next May, the New York-based company added.

"MSCI indexing rules have rejected GEM stocks out of hand from its index pool," said Ou Yangli, Huaxin Asset Management's deputy general manager and director of the CFA China Quantitative Specialists Committee. "If the above MSCI suggestions are reviewed and passed, GEM stocks will possibly be accepted by the MSCI index compiling rules after May 2019."
 

These developments are unfolding against the backdrop of China increasing the number and extent of its cross-border equity trading programs with other countries and regions. The much-anticipated London-Shanghai Stock Connect is expected to open before the end of this year.

MSCI used to include a country's big- and mid-cap stocks together, Chief Executive Henry Fernandez told Yicai Global in June. The rejection of A-share mid-caps was partly because the emerging market index's stock counts would have risen to about 1,200, of which 600 would have been Chinese.

Foreign investors would have had difficulty keeping up with the pace of learning and studying A-share companies and probably lack the capacity to cover so many firms in their research. Both MSCI and brokers had to take these factors into account, Fernandez added.

The strong desire on the part of overseas investors to get into the A-share market will not change in spite of heightened turbulence and persistent external uncertainties. The GEM board will likely bottom out at between 1,000 and 1,200 points while the second half's overall profits will not be significantly lower than the first half, Wu Zhaoyin, Avic Trust's director of macro-strategy, told Yicai Global. He expects a rally in the fourth quarter.
 

Editor: Ben Armour