Around $140 billion could be drained from the Australian stock market over the next decade as international investors divert funds towards China.
That's the warning from investment bank Credit Suisse, which argues the opening up of China's equity markets to the world will diminish the importance of Australian stocks globally.
Global stock index giants MSCI and FTSE are moving toward including China's A shares on their benchmark global indices in a move that will open up around $US9 trillion ($A11.61 trillion) worth of shares to investors around the world.
Credit Suisse research analyst Hassan Tevfik says while Chinese shares currently make up around one per cent of global share indices, he expects that to rise to nine per cent by 2025, making it the second biggest equity market in the world.
That will diminish the weighting of other markets on benchmarks, which Mr Tevfik says will see around $A140 billion (in today's dollars), or about 10 per cent of the value of the local market, being reallocated from Australia to China over the decade.
Meanwhile, he expects Australia's market to become less important within Asia.
"The destiny of Australia's equity market, for the next 10 years at least, is to be a much smaller fish in a considerably larger Asian pond," he said in a research note on Thursday.
"While Asia will rise in global importance, Australia could be marginalised within the region."
But he said the liberalising of China's financial system should see more Chinese money flow towards Australia.
"A more liberal Chinese capital account could mean more of the vast pool of Chinese savings finding its way into Aussie equities," he said.
"Much of this lost global demand for Aussie equities will be replaced by new Chinese demand."
Mr Tevfik said the opening up of China's markets should benefit a handful of Australian companies with a significant focus on Asia, including ANZ, Macquarie Group, Computershare and Platinum Funds Management.
Australia on Wednesday signed a historic free trade agreement with China that is expected to provide a boon for exporters and allow greater access for Australian companies to China.
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