Global market research and index company MSCI will add roughly 230 China-listed shares to its emerging market benchmark in a two-step process starting June 1. Markets expect the inclusion will draw tens of billions of dollars into the mainland's capital market. 

Professor John Gong at the University of International Business and Economics said that the inclusion is a very clear landmark for mainland market stepping into the international equity market.

“Inclusion of MSCI index means passive funds going after the index are gonna have to pour money into China and get into China’s equity market. So I think it’s a very good sign for China’s equity market and a well-welcome boost to the Shanghai Stock Exchange,” said Gong.

The director of the Economist Corporate Network, Robb Koepp agreed with Gong’s opinion, despite saying that the Hong Kong market's immediate reaction is very small.

MSCI stands for Morgan Stanley Capital International, which created the first global market indexes in 1968. An MSCI Index is a measurement of stock market performance in a particular area. Each index is reviewed quarterly and re-balanced twice a year.

The Chinese shares added to the MSCI benchmark will have a 2.5 percent partial inclusion factor, which will be raised on September 3rd to 5 percent as the second phase of inclusion. Experts say the move is significant for both global and domestic investors.

“For the overseas investors, this market actually provides them a platform to diversify their portfolio and their prospering also increased the institutional investors in the A-share market,” said Jimmy Zhu, the Chief Strategist for Fullerton Markets.

“We see this year, the A-share market starts to be more sensitive to overseas news, like the Fed and also the tariff. So probably the domestic investors need to pay more attention on the overseas macro-economic picture as well,” he added.

The inclusion of A-share was just part of China’s measures aiming to further open the country's financial sector. Some of the openings-up measures have already been put in place early in last century.

The first phase of China opening up its financial sector dates from 1978 to 1993, with foreign banks stepping into domestic markets. The second phase is from 1994 to 2001, when foreign banks were allowed to conduct RMB business in pilot cities and to participate in China's inter-bank lending market. Global insurers also entered China during this time, creating joint-ventures with Chinese partners. The third phase has begun since 2002, and foreign investors gained a foothold in China's equity market with the roll-out of the Qualified Foreign Institutional Investors program in 2003. 

When it comes to the business environment improvement for foreign investors, Gong said the efforts just mentioned have paid off without a doubt. 

“For many years, it’s very much regulated. The sector is dominated by Sino enterprises, very large state-owned banks. Now we are seeing more and more sort of non-traditional financial institutions from Internet space enter the financial market, and this development posts challenges for the industries,” he said, adding that competition from both technological aspect as well as the international market will make the domestic market more efficient and competitive.

Meanwhile, Koepp said that foreign investors could also help improve domestic resources allocation and support the economy.

“Foreign investors are going to be very interested in supporting competitive firms once they have good long-term competitive potential. They also introduce foreign investment standards to the domestic company, which means that China gonna have to up their game and become more transparent,” said the director. Koepp added that all of the measures are good for allocation because capital will flow to the most deserving companies in China, which is a positive development.

Recently, China raised foreign ownership limits in securities to 51 percent from 49 percent. However, for Koepp, the better way to open up is to allow complete ownership rights.

“Truly opened up doesn’t just mean the laws allow you to come in but in terms of market practice, or in terms of state-owned enterprise banks, competing fairly with foreign or even Chinese private banks,” he said, explaining the No. 1 issue for China is simply how much it is truly opened up.

But China is indeed on the way. Foreign ownership limits will also be increased to 51 percent in futures and life insurance companies and the ownership cap on those companies will be gradually raised over the next three years. The daily quota for the Shanghai-Hong Kong and Shenzhen-Hong Kong stock connect program was quadrupled on May 1. Some additional policies will be rolled out before the end of June.

China will also encourage foreign investors to enter the trust, financial leasing, and auto as well as consumer finance sector. There will be no foreign ownership limits for financial asset investment and wealth management companies that are newly established by commercial banks. 

We can also expect wider market access in the financial sector to be introduced by the end of the year. As Gong and Koepp said, such measures can reduce the financial risk as international capital flows to China. 

“One of the bigger issues in the Chinese equity market is that it’s very speculatively driven. And the market magnetism is known for having great deals of efficiency. So the ideal will be when you lead in foreign investors with much more sophisticated approach to equity market, that’s going to lower the risk because of their investment style,” Koepp said, noting foreign investors are only concerned about whether they can buy and sell as they choose instead of according to political factors.

Gong was quite positive on the future of China’s financial market by saying all the measures would help mitigate the potential risks. “In China’s case, due to China’s large economic size, I think the potential risks are under control,” he explained.