MSCI Inc. (NYSE: MSCI) rejected China’s key emerging market index for the 3rd time. This is a blow for Chinese policymakers who have rushed to address MSCI's concerns over the past six months in the hope that inclusion in the Emerging Markets Index, tracked by $1.5 trillion in global assets, could draw up to $400 billion into China's stocks over the next decade.
In a statement accompanying its verdict—delivered as MSCI also said it would admit Pakistani stocks to the index—the index provider pointed to a key remaining issue for investors when it comes to Chinese markets: their ability to get money in and out of the country without limits.
Beijing remains reluctant to allow capital to flow freely across its borders. While the government is happy for more foreign money to flow into Chinese stocks, it is wary of rapid outflows when trouble hits.
Chinese stock market seemed to shrug off the news, however, rising more than 1 percent in morning trade.
Market-watchers and analysts said the surprise decision, the third year running and was rejected, highlighted reservations among global institutional investors about yuan-denominated assets and Beijing's commitment and ability to implement capital markets reform.
China's markets have had a stormy year, with a 40 percent slump in stocks, followed by heavy state intervention and an unprecedented exodus of capital that has put pressure on the Chinese currency.
"The decision highlights a much bigger issue, which is the resistance among global investors to allocate into yuan assets, despite the fact China is home to the world's second-largest equity market and third-largest bond market," said Peter Alexander, CEO of investment consultancy Z-Ben Advisors in Shanghai.
He added that the decision placed global investors "on the wrong side of history".
China's securities regulator said on Wednesday any global benchmark index that doesn't include China A shares is incomplete, but the decision wouldn't affect reforms to open its markets.
Remy Briand, MSCI global head of research, told reporters on Wednesday that China's reform programme was moving in the right direction but investors had concerns over the process for allocating investment quotas and monthly limits on repatriating capital.