May 25, 2017 / 5:13 AM / in 2 months

China shares shrug off downgrade, rise on hopes for MSCI inclusion; HK also up

3 Min Read

* SSEC +0.4 pct, CSI300 +0.7 pct, HSI +0.6 pct

* Expectations rise for MSCI index to soon include China A shares

* "Nifty Fifty" SSE 50 index on track to close at 17-mth high

* ChiNext index slips to near a 15-month low

SHANGHAI, May 25 (Reuters) - China stocks rose sharply on Thursday morning, as investors dump small-caps but swarmed into blue-chips, amid rising hopes that global index provider MSCI Inc will agree next month to add mainland shares to its benchmark.

The market appears to have shrugged off Moody's downgrade of China's credit rating on Wednesday, after several senior government officials in Beijing criticised the decision.

By lunch break, the blue chip CSI300 index was up 0.7 percent, to 3,449.11 points, while the Shanghai Composite Index had gained 0.4 percent, to 3,075.98 points.

Highlighting diverging fortunes on Thursday, the SSE 50 - dubbed China's "Nifty Fifty" index - jumped 1.7 percent and was on track to close at a 17-month high. But China's Nasdaq-style board ChiNext dropped 1.3 percent, nearing a 15-month low.

Expectations were building that MSCI, which didn't add Chinese shares to its Emerging Markets Index for a third year in 2016, will announce China's inclusion when it issues its annual classification review on June 20.

In not adding China last year, MSCI cited concerns over share suspension rules and monthly limits on repatriating capital.

In March, MSCI proposed rules that would slash the number of China stocks to be included by two-thirds to 169, potentially benefiting only the biggest players.

China Securities Co., a brokerage, said in a report on Wednesday "The chance of an A share inclusion into MSCI has risen drastically for 2017."

The brokerage encouraged continued buying of leading blue-chips, which have already have outperformed small-caps this year.

Others who have expressed optimism about MSCI including A shares this year include JP Morgan, China International Capital Corp and BlackRock.

On Thursday, financials and real estate shares jumped more than 2 percent, offsetting declines in other sectors such as transport and utilities

Hong Kong

Hong Kong shares followed Asian markets higher, even after Moody's late on Wednesday also downgraded Hong Kong's local and foreign currency issuer ratings.

The Hang Seng index added 0.6 percent, to 25,576.60 points, while the Hong Kong China Enterprises Index gained 1.3 percent, to 10,525.50.

Asian shares scaled two-year highs on Thursday after the U.S. Federal Reserve signalled a cautious approach to future rate hikes and the reduction of its $4.5 trillion of bond holdings.

Reporting by Samuel Shen and John Ruwitch; Editing by Richard Borsuk

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