Global equity indexes provider MSCI took a discreet stance, again, by announcing on Wednesday that it would delay the inclusion of Shanghai- and Shenzhen-listed stocks, or A-shares, on to its emerging market index.
The decision is understandable, in light of lingering uncertainty and concerns, but might lack foresight when reviewed in the near future.
It is a pity that the decision-makers have been hesitant, again.However, the MSCI decision is a delay not a rejection, after all, the world's second largest and fastest growing capital market is just too big to ignore.
A global stock index without China A-shares is incomplete and cannot fully represent the potential market value of emerging countries. Regrettably, for the long-term interests of Chinese and global investors, it would have been better to have acted sooner rather than later.
International investors should not hold out for the "perfect scenario." The sooner MSCI includes China A-shares, the sooner the Chinese, and global, capital market will reap the gains from wider connectivity, and the more opportunities international investors will enjoy.
MSCI acknowledged China's significant improvements in accessibility of the yuan-denominated A-shares market, but expected more progress, adding the inclusion will still be discussed in its 2017 review with odds of a potential off-cycle announcement, should further positive developments occur ahead of June 2017.
Chinese financial authorities have reduced investment barriers by relaxing quotas on foreign investment in domestic stocks, allowing for more flexible remittance of funds and revising existing rules to better regulate suspensions and limit trading halts.
The Shanghai-Hong Kong Stock Connect, a program to expand foreign fund access to Chinese mainland, has seen active transactions since its establishment in 2014. Similar initiatives, to connect Shenzhen with Hong Kong and Shanghai with London, to make the market more accessible are also in the pipeline.
China still has a long way to go in its journey to become a truly open and mature capital market and it will take time. But with China's gradual opening guaranteed to continue, getting ahead of it with more investment via earlier MSCI inclusion would offer bigger and better opportunities.
The inclusion will offer global investors more diversity, deeper emerging market exposure and greater access to the growth potential of Chinese equities.
The short-term impact of inclusion for China will actually be small with limited foreign capital inflow during the initial stage, but it could push for faster market maturity with more institutional investors entering the country's retail-driven stock markets.
Discretion is necessary as global clients are cautious about including new stock markets, but this decision can not come soon enough for the world and China to benefit.
MSCI inclusion or not, China will continue to liberalize its capital market at a gradual pace and in a steady manner to avoid wild swings to the detriment of global financial stability.