Chinese equities have stumbled this year, but a recent development might have the ability to provide some relief in the near term.
Index provider MSCI said in its most recent quarterly index review that it will be proceeding with the second phase of partial inclusion of China A shares, referring to stocks traded in mainland China, in the MSCI Emerging Markets Index and other indexes.
As part of that, the company is adding an additional 2.5 percent of the market capitalization of the stocks included in the index. Ten A shares will also be added as part of the review, taking the total number of A shares in the MSCI China Index to 236 and representing 0.75 percent of the MSCI Emerging Markets Index.
MSCI will also be making 13 additions to its China All Shares Index. Those companies included China Shenhua Energy, China United Network Communications and Hengli Petrochemical, as well as telecommunications equipment maker ZTE. The changes will be implemented at the end of August.
While the news is not expected to be a major game changer, given how around 230 A shares were first included in the key global index in June, it could prove to be good news to Chinese markets, which have tanked this year.
“I would say that because it’s mostly expected, I think the positive impact on the Chinese market would be marginal, but then because the market here has fallen substantially, so any foreign money coming in would be a help to stabilize the Chinese stock market,” Hao Hong, head of research at Bank of Communications International, told CNBC’s Dan Murphy.
Both the Shanghai Composite and Shenzhen Composite were in bear market territory at the end of Monday. The Shanghai benchmark was down more than 22 percent from its 52-week high at the previous market close.
Even though the Shanghai share average remained stuck in a downtrend, Hao suggested that some near-term upside is a possibility.
“I think the downward trend is intact, but then I think in the near term, because the market is so oversold, and also because we’re detecting some policy shift from the top, so I wouldn’t be surprised to see some consolidation or even a small technical rebound from here,” he said
As of late Tuesday morning, the Shanghai Composite was trading lower by 0.52 percent and the smaller Shenzhen Composite eased 0.67 percent.