Previously, many investors have gained access to the Chinese market and its fast-growing economy through a handful of Chinese companies with Hong Kong-listed H-shares.
Over the past three years both the A-share indices of the Shenzhen and Shanghai stock exchanges – China’s two major mainland indices – have outperformed the MSCI World index as the chart below shows.
Performance of indices over 3yrs
Source: FE Analytics
Despite concerns over the impact of Chinese indebtedness on the sustainability of economic growth, investors remain keen to gain exposure to the market.
The provider noted that the decision had garnered broad support from international institutional investors.
MSCI plans to add 222 China A large-cap stocks, representing approximately 0.73 per cent of the weight of the MSCI Emerging Markets index, on a pro forma basis.
It plans to launch a number of provisional indices to reflect the inclusion of the Chinese stocks into the Emerging Market and All-Country World indices.
Remy Briand, MSCI managing director and chairman of the MSCI index policy committee, said: “International investors have embraced the positive changes in the accessibility of the China A-shares market over the last few years and now all conditions are set for MSCI to proceed with the first step of the inclusion.”
He added: “MSCI is very hopeful that the momentum of positive change witnessed in China over past years will continue to accelerate.”
The move has been welcomed by some China-focused fund managers, who believe it will help institutionalise the market and raise its profile.
Robert Horrocks, chief investment officer at Matthews Asia, said that for investors the decision will allow foreign investors “to participate directly in companies that are benefiting from one of the most dynamic economies in the world”.
He noted: “In our opinion, China’s A-share market has simply been too big to be overlooked by global investors.
“It is the second-largest equity market in the world, both in terms of market capitalisation and turnover. Until now, the structure of MSCI indices have been lacking in their representation of China’s overall markets.”
Dale Nicholls, portfolio manager of the Fidelity China Special Situations trust, said: "The announcement by MSCI has been widely expected and is positive news for China’s onshore markets.
“This is a further step forward in the opening up of China’s capital markets and ensures foreign investors can no longer ignore China’s onshore market.
“The breadth and depth of China’s onshore market is huge, but still relatively under-researched, which means there are many interesting stock picking opportunities. I would expect that over time the onshore A-share market grows in importance not just in Asia, but globally too."
Aidan Yao, senior emerging Asia economist at AXA Investment Managers, said: “Even though most – non-passive – investors are likely to stand pat, the MSCI inclusion will help put A-shares on their radar screen.
“As Chinese equities, bonds and currency enter into global benchmarks, investors can no longer ignore China as they used to, because doing so will have an impact on their relative performance.”
Yao said Chinese equities were “not unattractive” from both a valuation and earnings growth perspective, adding: “With the macro condition stable and the renminbi actually appreciating lately, investing in Chinese stocks does not seem like a bad trade.”
While only 5 per cent of the Chinese A-shares’ full weight will be included in indices initially, that percentage could potentially increase and could see the addition of mid-cap stocks, the index provider MSCI noted in its statement.
Source: AXA Investment Management
However, even at 0.73 per cent of the emerging markets index, billions will still flow into Chinese A-shares, Yao said.
“This, by our estimate, will usher in a total of $16bn inflows to A-shares, which accounts for less than 1 per cent of China’s A-share market cap, and a fraction of its daily trading volume,” he explained.
Gary Greenberg, head of emerging markets at Hermes Investment Management, (pictured) warned that management at many Chinese A-share companies “have yet to fully grasp the duties imposed by a listing, not to mention inclusion in a global index”. 
He added: “We continue to encounter managements of large A-share companies who have yet to appoint an investor relations officer and who see no reason for senior management to meet shareholders.
“The ability to communicate with foreign investors, even in companies with worldwide operations, tends to be less than world class. For businesses with top line revenues that can top $15bn, this should have been fixed by now.”
He added that corporate governance can often be challenging for Chinese companies, as management may owe primary allegiance to municipal, provincial or national administrations.
“Capital discipline, avoiding low-return projects, can run into conflict with the requirements of a related city or province for new infrastructure,” he said.
Yet, passive investment giant Vanguard added that exposure to China’s economy was important for global investors.
“In particular, as part of a globally diversified portfolio, exposure to A-shares will benefit investors from both a diversification and return perspective regardless of the short-medium term performance of the Chinese economy, on which we are nevertheless relatively optimistic,” it noted.
“We see China’s equity market as a critical diversifier. A-shares in particular have a low correlation with the rest of the global equity market.”