Global index provider MSCI has announced that it will not be including China A Shares in its Emerging Market index. This is the third year in a row that China’s domestic market has been denied entry into MSCI’s indices.

MSCI leaves China A Shares out of MSCI Emerging Markets index for third year running

Not being included in the index will come as a blow to policy makers in Beijing who have been working hard to reform China’s domestic market, opening up its financial markets to attract foreign capital. China is the world’s second-largest equity market.

In a note from MSCI, it said: “Over recent months, Chinese authorities have introduced significant improvements in the accessibility of the China A shares market for global investors. These improvements touch the major categories previously cited as impediments to inclusion:  resolution of the issues regarding beneficial ownership, enhanced regulations on trading suspension, which was flagged as the most critical by investors, and QFII policy changes aimed at addressing quota allocation and capital mobility restrictions.

Remy Briand, MSCI Managing Director and Global Head of Research, commented: “There have been significant steps toward the eventual inclusion of China A shares in the MSCI Emerging Markets Index….They demonstrate a clear commitment by the Chinese authorities to bring the accessibility of the China A shares market closer to international standards. We look forward to the continuation of policy momentum in addressing the remaining accessibility issues.”

The decision, which also saw MSCI grant Pakistan entry into its Emerging Market index (meaning China’s mainland market and Pakistan are now considered on level pegging), was also based on regulatory concerns and issues around accessibility for global investors.

Briand added: “International institutional investors clearly indicated that they would like to see further improvements in the accessibility of the China A shares market before its inclusion in the MSCI Emerging Markets Index. In keeping with its standard practice, MSCI will monitor the implementation of the recently announced policy changes and will seek feedback from market participants.”

Danny Dolan, Managing Director at China Post Global, who entered the European ETF market through the acquisition of RBS ETFs in March this year, said: “Clearly, it was decided that additional steps are needed for full inclusion of A-shares in investor portfolios globally. Significant progress has been made already – the Chinese equity market is much more accessible today to international investors.

“Soon China will no longer be under-represented in global benchmark indices and investor portfolios. China is not only the second largest equity market globally; it is a market that offers great investment opportunities. Full inclusion is still a question of when, rather than if. What is certain is that when that happens, it will generate substantial capital inflows into China.”

China had to address four key areas last year, only one of which was satisfactorily fulfilled. It will now have a year to address the three remaining areas, which include; QFII policy changes affecting accessibility and capital mobility, implementation of measures preventing widespread voluntary suspensions of trading, and pre-approval requirements imposed by local Chinese stock exchanges.  China A Shares will remain on the review list for 2017.

MSCI is one of the largest index providers to ETFs globally with a number of ETFs tracking the MSCI Emerging Markets index. The Lyxor MSCI Emerging Markets UCITS ETF C-USD (LSE:LEML) costs 0.55% and tracks the MSCI Emerging Markets index. It has returned 9.01% year-to-date, according to Bloomberg.

A spokesperson from asset manager BlackRock said that it welcomed the progressive reforms made in China’s capital markets over the last year. “This is an important investment destination for our clients globally, so the opening of its markets to provide access to the world’s second-largest economy is significant.”

“As a long-term investor, we would welcome further progress in facilitating broader participation in the nation’s domestic stock markets for international investors. We look forward to developing our operations and business in China.”

However, market watchers argue that inclusion in the international indices is not a question of if, but when.