The country obviously has growing stature in the global economy, while A-shares have been around for 25 years.
The index provider announced that after four reviews, beginning in 2013, it will start to add 222 large cap China A-stocks to its Emerging Markets Index from June next year.
The development opens China up to international investors by allowing them to access companies trading on Chinese stock exchanges, but it will take time to reap the full benefits of the move.
China will subsequently only represent 0.73% of the $1.5trn index, 0.8% of MSCI Asia Ex-Japan, 2.6% of MSCI China and less than 0.1% of the MSCI All Country World Index.
Initial inflow into the market is expected to be in the region of $1.5bn.
The overall weight of China in the EM index is anticipated to reach about 9% as the inclusion factor is increased from the initial 5% to 100%.
But even then China will still remain the most under-represented country in the index compared to its economic significance.
This is hardly a gleaming endorsement for A shares: the world’s second-largest stock market with a market capitalisation of $7.5trn.
Including A-shares in the index undoubtedly has clear benefits for asset owners, but why has it taken so long and why such a low initial representation for a country with the second-largest stock market in the world?
The low level of investor confidence in China to date has been driven by concern over governance and structural issues at Chinese-listed companies.
That explains why it has taken MSCI four years and three failed attempts to finally allow A shares a tiny 0.73% share of the index.
China has upped its game in recent years, thanks largely to the success of the Hong Kong-Shenzhen and Hong Kong-Shanghai Stock Connect exchanges, which opened late last year and in 2014 respectively.
Remy Briand, managing director and chairman of the Index Policy Committee at MSCI, described these a “game changer” for the decision.
Jan Dehn, head of research at Ashmore Group believes negativity towards China is ill-founded because it has for many years had relatively stable growth and inflation rates, a firm commitment to reforms and very little political uncertainty.
He added: “We expect that index inclusion – which implies that investors will now have to take actual positions rather than just pontificate – will force commentators to abandon their often baseless pessimism and outright prejudice about China in favour of more mature, well-grounded views of the country and where it is heading.”
But MSCI appears to be hedging its bets because the inclusion of A-shares in its index has not come without caveats.
The index provider said further inclusion depends on seeing a greater alignment of the China A-shares market with international market accessibility standards and the resilience of Stock Connect.
It also wants to see a relaxation of daily trading limits, continued progress on trading suspensions, and further loosening of restrictions on the creation of index-linked investment vehicles.
Will Ballard, head of emerging markets and Asia Pacific equities at Aviva Investors, observes that a removal of the additional index construction rules MSCI has put in place could lead to A shares eventually accounting for 20% of the MSCI EM Index.
“By Bank of America Merrill Lynch’s March 2016 calculations, that could amount to a cumulative inflow of $320bn for China,” he added.
This would be a welcome boon for both China and global investors looking to capitalise on its growth story. The problem is it is likely to take a while to reach this point.