China may have opened the door to western investors but still needs to ensure that it doesn't slam it shut behind them. That was the message from equity index compiler MSCI as it left China's domestic share market out of its benchmark Emerging Markets Index for a third time.
The decision means China's "A" share market, the world's No. 2 stock market by value, remains beyond the grasp of many tracker and active funds, whose scope to invest in global markets is dictated by MSCI's list. China's inclusion would have almost certainly triggered an inflow of capital, providing at least a short-term boost to share prices.
Exclusion from MSCI's good graces is likely to be felt keenly in Beijing. Chinese authorities have introduced a spate of reforms in an attempt to win their domestic market a place on the index.
MSCI said investors had been encouraged by the reforms, which include clarification of the rules governing trading halts and improved accessibility for foreign investors. But it warned there was more work to be done and singled out restrictions on foreign investors pulling cash out of the Chinese market as a key issue.
"The 20% monthly repatriation limit remains a significant hurdle for investors that may be faced with redemptions such as mutual funds and must be satisfactorily addressed," said MSCI.
Analysts said that the likely impact of the decision would be negative, at least in the short term, but was unlikely to have a lasting impact. "China's A-share markets may trade lower near term on this news," Morgan Stanley noted, while maintaining its prediction that the Shanghai Composite index was heading for 2,900.
Even that mildly pessimistic prediction appeared overdone. The Shanghai Composite traded Wednesday afternoon at 2,887.21, up 1.58% on its Tuesday close. The tech-heavy Shenzen Composite climbed to 1,889.87, up 3.12%.
While China remained outside MSCI's embrace, the index compiler said that Pakistan's market will be reclassified to emerging markets index status in May 2017. Pakistan stocks have been on MSCI's Frontier Markets Index since May 2009.
Saudi Arabia also edged its way toward inclusion on the emerging markets list. MSCI noted that forthcoming reforms to open the Saudi Stock Exchange, known as the Tadawul, to foreign investors and the elimination of the need for cash deposits to trade in shares "will bring the Saudi equity market closer to emerging market accessibility standards."