Inclusion set to trigger short-term rally on higher liquidity expectations

Chinese A-share stocks rose on Monday after global equity index provider MSCI Inc announced that it will launch MSCI China A Inclusion Indexes this week.

The Shanghai Composite Index closed the day with a 0.06 percent gain to 3,380.7 points. The Shenzhen Component Index rose by 0.6 percent, and the ChiNext startup index climbed by 0.99 percent.

Global equity index provider MSCI Inc announced on Friday that it will launch MSCI China A Inclusion Indexes on Oct 23, preparing for including A shares in the MSCI Emerging Market Index in 2018.

MSCI said in June that it would include 222 large Shanghai and Shenzhen listed companies into its widely followed Emerging Market Index. The decision by MSCI may elicit initial inflows of $17 billion to $18 billion into the domestic equity market, according to MSCI estimates. Capital inflows may reach $340 billion if A shares are wholly included in the MSCI indices.

"Inclusion would be an important milestone for China's equity market and may trigger a short-term rally due to increased expectations of fresh liquidity entering the onshore market," said Jing Ulrich, vice-chairwoman of Asia Pacific at JPMorgan Chase& Co.

Shanghai-related stocks advanced on Monday as the city's Party chief Han Zheng last Thursday confirmed plans to reinvent its pilot free trade zone as a world-class free port. Experts said such an ambition would be accompanied by plans to further relax import cargo Controls and streamline customs clearance in accordance with international practices.

Shanghai Shine-Link International Logistics Co Ltd, CTS International Logistics Corp Ltd, Shanghai Material Trading Co Ltd, COSCO Shipping Technology Co Ltd and YUD Yangtze River Investment Industry Co Ltd climbed by the 10 percent upside limit. Orient International Enterprise Ltd increased by 6.36 percent and Shanghai Jiao Yun Group Co Ltd rose by 5.93 percent.

China's Nasdaq-style ChiNext board performed well on Monday with increase of almost 1 percent. Shenzhen Hirisun Technology Inc has done especially well, climbing by the 10 percent upside limit for four of the past five consecutive trading days.

The latest report of BOC International said the A-share market, especially the ChiN-ext board, will be positive benefiting from a pleasing manufacturing Purchasing Managers Index in September and the earlier-than-expected reserve requirement ratio cut on Sept 30.

Li Shuguang, a law professor at China University of Political Science and Law, said investors favor companies listed at the ChiNext board because the market value is comparatively small. Li added that there are some bubbles at the board, so investors should be cautious.