CHINA suffered a setback earlier this week when the MSCI decided to delay yet again the inclusion of its domestic A-share market into the key Emerging Markets Index. In the run-up to the announcement, analysts had been broadly optimistic, with Goldman Sachs for example giving it a 70 per cent chance.

Expectations had run high on the potential inflow which could help in the long run to stabilise a notoriously volatile stock market dominated by retail investors.  At an initial 5 per cent inclusion, the A-share market would get an index weight of one per cent. HSBC Global Research  estimates an initial inflow of roughly US$4 billion to US$6 billion of passive funds, and an expected US$16 billion to US$24 billion from active funds. Eventual full inclusion would raise the A-share market's weighting on the index to 18 per cent, and the overall China weighting to a substantial 40 per cent.

MSCI's statement on Tuesday makes clear that an "off-cycle" announcement remains possible ahead of June 2017, pending "significant positive developments". It also makes clear what developments global institutions want to see on the liquidity, capital mobility and regulatory fronts, even as it notes the "significant improvements" made by Beijing thus far. In February, for instance, China eased QFII (Qualified Foreign Institutional Investor) rules allowing eligible investors to get up to US$5 billion in quota and reducing the principal lock-up period. But certain conditions remain unchanged, such as a cap on monthly repatriation at 20 per cent, which raises a liquidity concern on funds facing redemptions, said MSCI.