China Starts Its Journey to Open Exchange Market

China’s stock market is over a century old and it’s currently the second biggest market in the world, just behind the U.S. Despite its high-ranking, foreign investors have limited access to China’s exchange market, which is tightly controlled. But this could all change pretty soon.  Namely, after MSCI's decision, the CSI 300 listed index in the Shanghai and Shenzhen stock market hit highest levels in the last year and a half., state investment experts from WC Capital Management, LLC.

On June 20, this year, MSCI - the giant New York-based stock index provider included 222 Chinese stocks, called "A shares," in its popular markets stock index. Financial companies have an estimated $1.6 trillion riding on this emerging market. These 222 companies represent less than 1 percent of the key Chinese listings. By adding China’s A-shares, stocks denominated in yuan and listed in either Shanghai or Shenzhen, to its widely followed Emerging Markets Index can boost the demand for Chinese stocks by billions of dollars over time. Passive investment funds that follow the MSCI index will have to be bought in Shanghai’s and Shenzhen’s markets.

By opening up the stock market to international investors, China also took a major step toward global acceptance. In the last two years, the A-share market's progress towards globally accepted rules and regulations has helped ease foreign investors' concerns. Soon, American investors will be able to gain exposure to a limited number of home-grown stocks in mainland China. This way they could tap the potential growth of the world's second-biggest economy. Owning a piece of domestic companies in China will be possible through mutual funds run by managers or index funds, as well as ETFs that track the MSCI Emerging Markets Index, explain from WC Capital Management, LLC, a California based investment management firm and hedge fund sponsor.

Although foreign investors can buy and sell shares issued by Chinese companies listed in Hong Kong, they will still have limited access to the mainland exchanges where China’s mainland-based companies are listed. In addition to that, China still limits the amount of money that foreign investors can repatriate each month. Due to limited access to the mainland Chinese stocks, foreign investors own less than 1.5 percent of that market. Pretty soon, up to $18 billion could flow into Chinese A shares.

Thanks to this long-awaited endorsement, as MSCI increases China’s weighting, analysts estimated that a total of $US210 billions of index money could flow into China in the next five years. There’s no doubt that it will take some time for China to completely open up its markets to global investors, but once it does, it will reap its sweet reward.