Chinese stocks are on the brink of joining an important global club, and the market is roaring

Photo: Kevin Frayer/Getty Images.

Led by financials, Chinese stocks went nuts on Tuesday, jumping by over 3% amid speculation that mainland A-shares may be included in the MSCI’s benchmark indices as early as next month.

The benchmark Shanghai Composite index closed the session at 2,916.62 points, up 3.32% for the session. Those gains were mirrored in other mainland indices, with large cap indices such as the SSE 50 and CSI 300 rising by 3.0% and 3.35% respectively.

Curiously, small cap stocks are outperformed their larger rivals with the CSI 500, Shenzhen Composite and ChiNext indices all posting gains of more than 4%.

According to Bloomberg, the odds that mainland stocks will be included in MSCI’s indexes received a boost on Friday when the Shanghai and Shenzhen stock exchanges published rules restricting trading halts in listed securities, an action that that many firms implemented during China’s stock market crash in 2015 in order to prevent the value of shares falling any further.

Following the moves from the Shanghai and Shenzhen stock exchanges, US investment bank Goldman Sachs now sees a 70% probability that the MSCI will include mainland stocks in their benchmark indices, up from 50% that the bank stipulated in April.

Last June the group failed to include mainland stocks in its indices, citing to investment restrictions on investors.

Following that decision, Chinese market regulators have addressed many of MSCI’s concerns, expanding its Qualified Foreign Institutional Investor (QFII) scheme and clarifying foreign ownership rights, allowing the MSCI to reconsider inclusion of mainland shares in its benchmark indices in June.

While markets have rocketed higher in a speculative frenzy, the inclusion is unlikely to trigger an avalanche of capital flows into China, according to Reuters.

“Even a 5 percent weighting in the MSCI indexes will roughly translate into a net $15 billion in inflows into ‘A’ shares, tiny in comparison to daily turnover or size,” it said.

Even with Tuesday’s gains, it’s been a terrible year for Chinese stock investors with the benchmark Shanghai Composite index currently down 17.5% year to date.

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