Ten firms added to index, bringing the total number of Chinese companies to 236  

Foreign demand for yuan denominated equities is likely to increase following the second phase inclusion of Chinese A shares in the MSCI Emerging Markets Index on Friday, according to analysts.

The inclusion comes as Beijing continues with reforms to further open up its US$7 trillion stock market amid its ongoing trade war with the US.

MSCI also increased the weighting of the Chinese large caps to about 0.8 per cent of the index from 0.4 per cent, which was introduced during the first phase of their inclusion in June.

Ten companies were added to the index, bringing the total number of Chinese companies to 236. The partial inclusion factor was doubled to 5 per cent, meaning the stocks will be included based on 5 per cent of their free-float market value.

Given Friday¡¯s relatively smooth operations, MSCI is expected to continue with the process, possibly doubling the weighting to 10 per cent in 2019. The UK indexes compiler FTSE Russell is likely to promote Chinese A shares to secondary emerging status on September 26, and said it could give them more weighting than MSCI.

¡°Chinese equities are under-represented in global investors¡¯ portfolios, but will eventually become mainstream for them,¡± said Stephane Loiseau, head of cash equities and global execution services for Asia-Pacific at Societe Generale.

Last week, the China Securities Regulatory Commission said it was seeking public feedback on letting the about 900,000 foreign residents who work on the mainland invest on the Shanghai and Shenzhen stock exchanges.

The MSCI China A Inclusion Index has underperformed as compared with other major onshore indexes such as the Shanghai Composite Index and the CSI300 since June, partly because of being overweight on the financial sector, which has witnessed growth concerns recently as well as speculation over tariffs as part of the US-China trade war.

The net buying of mainland traded stocks via links with the Hong Kong stock exchange reached 1.73 billion yuan (US$253 million) in August, compared with 1.53 billion yuan in July, although this number was less than May¡¯s 2.72 billion yuan, according to Bloomberg data.

Jason Lui, head of Asia equity and derivative strategy at BNP Paribas, also said that while active investors might continue to allocate into Chinese stocks following the MSCI inclusion, a list of companies was not receiving any investment. These included Shenwan Hongyuan Group, PetroChina, Bank of Jiangsu and China National Nuclear Power, companies that had large MSCI weighting but low foreign ownership.