By Casey Hall

SHANGHAI (Reuters) - Shares in Alibaba Group jumped 4.2% on Tuesday as investors cheered its inclusion on China's mainland stock exchanges after the e-commerce giant upgraded its Hong Kong listing to primary status last month.

Its transition to a dual primary listing has paved the way for the company to be added to the Stock Connect Scheme that allows mainland investors to buy the stock of the country's biggest e-commerce firm by market value. Alibaba announced the inclusion late on Monday evening.

Morgan Stanley analysts had predicted that the addition of Alibaba to Stock Connect would be an "imminent share price catalyst" and estimated net inflows could be between $17 billion and $37 billion for Alibaba from mainland investors over a 12-month period.

But UBS analysts noted the market reaction was rather muted.

"While some estimates suggest that $12 billion of onshore funds could flow in, there's hardly any reaction in shares," they said in a note, adding that mainland trading currently accounts for about "a third" of the daily turnover in Hong Kong's $5 trillion market.

A boost from mainland investors would certainly be welcome for Alibaba, which has seen Hong Kong listed shares fall more than 70% since a multi-year regulatory crackdown launched in 2020.

More recently, a sluggish Chinese consumer market hit by a prolonged property crisis and concerns about employment and income security has stalled the growth of e-commerce in the world's second-largest economy - with low-price competitors such as PDD Holdings making a grab for market share.

In late August, Chinese regulators announced Alibaba had completed a three-year rectification period following the levying of a record fine for monopolistic practices in 2021, raising hopes that Alibaba might now be able to draw a line under its prolonged period of regulatory headaches.

Joining the Stock Connect Scheme has helped boost turnover for companies such as smartphone maker Xiaomi, and around 10% of Tencent shares are now held by mainland investors via the scheme.

(Reporting by Casey Hall in Shanghai, additional reporting by Gu Li; Editing by Miyoung Kim and David Evans)