The index firm says China's A-shares market, which has been in the spotlight recently, is not quite ready to be included in its global benchmarks.

Wealth management firms so far appear relaxed about a decision this week by market benchmark group Morgan Stanley Capital International not to include mainland China’s A-shares in its global indices, and reassured that MSCI and Chinese regulators will create a working group to iron out remaining issues.

There has been a flurry of commentary about MSCI possibly incorporating A-shares, a fast-developing market, into its flagship indices. Such a move would allow global investors such as pension and life insurance funds to hold such securities in line with their mandates.

There are hurdles to such inclusion, however, such as China’s investment quota allocation process, restrictions on capital flows and issues around beneficial ownership.

MSCI said it “expects to include China A‐shares in its global benchmarks after a few important remaining issues related to market accessibility have been resolved”. MSCI will work with the China Securities Regulatory Commission on these matters, the benchmarking group said in a statement yesterday.

“Substantial progress has been made toward the opening of the Chinese equity market to institutional investors,” Remy Briand, MSCI managing director and global head of research, said in a statement.

“In our 2015 consultation, we learned that major investors around the world are eager for further liberalisation of the China A‐shares market, especially with regard to the quota allocation process, capital mobility restrictions and beneficial ownership of investments,” Briand said.

MSCI said it may announce the decision to include China A‐shares in the MSCI Emerging Markets Index as soon as the issues it has outlined are resolved. This may happen outside the regular schedule of its annual market classification review, the organisation said.

Separately, MSCI said that it will include the MSCI Pakistan Index in its 2016 annual market classification review for a potential reclassification to emerging markets. It will also seek feedback from international institutional investors on the accessibility of the Saudi Arabia equity market following its opening on 1 June before considering adding the MSCI Saudi Arabia Index to the review list for a potential inclusion in the MSCI Emerging Markets Index.

The decision to wait for further progress on China is not a shock, Matthew Sutherland, investment director, Fidelity Worldwide Investment, said in a note.

“This morning [Tuesday] MSCI announced that they would defer including China A-shares into their benchmarks, citing issues around access to the market. Whilst there could be some short-term disappointment on the part of domestic retail investors around this decision, it is not a surprising decision and we don’t feel it will be a major market-moving event,” Sutherland said.

“Accessing the China onshore market has become easier since the development of the Hong Kong-Shanghai Connect programme. Previously you could only access the A-share market if you had a Qualified Foreign Institutional Investor quota or Renminbi Qualified Foreign Institutional Investor  quota, both of which are limited in size and do not offer daily liquidity,” he continued.

“However, the Connect programme still has obstacles to access such as daily and aggregate quota, concerns over beneficial ownership and rights to capital distributions, and issues around pre-funding and pre-delivering for purchases and sales. Also, not all Shanghai A-shares are included, and for now, the other A-share market, Shenzhen, does not have a connect programme – although that is expected to be announced soon,” Sutherland said.

The parties with most at stake in such index classifications are passive funds that need to be able to match a benchmark exactly, he said, and be able to rebalance daily and offer daily liquidity.

Mike Sell, head of Asian equities at Alquity Investment Management, took a relaxed stance on MSCI’s position.

“Several times a year markets get very excited about the inclusion of various countries in various indices. Today it is A-shares. This is to completely miss the point of investing. We should be buying companies because they are well run (with good forward looking environmental, social and governance factors), have a good business model and will deliver returns to shareholders,” Sell said.

“Whether a company is in an index or not is irrelevant in terms of the above. An un-benchmarked approach to investing, focusing on fundamentals rather than an artificial index construction surely is the more logical and correct approach,” he said.