MSCI's decision to keep mainland-listed shares out of its key emerging markets index was a blow to China's regulators, who had stepped up reforms in recent months to win over the index provider.
But the initial reaction from China was largely pragmatic, with state news agency Xinhua commenting that inclusion was "purely just a matter of time."
The Shanghai composite and the Shenzhen composite opened down more than 1 percent each, but then retraced their losses to trade up 0.33 percent and up 1.44 percent respectively by mid-morning SIN/HK.
MSCI announced on Tuesday evening ET that it had once again decided not to include A shares in its EM index.
The index operator said, "International institutional investors clearly indicated that they would like to see further improvements in the accessibility of the China A shares market before its inclusion in the MSCI Emerging Markets Index."
MSCI said investors needed more time to assess the effectiveness of the Qualified Foreign Institutional Investor program (QFII) investment quota allocation, capital mobility policy changes and the effectiveness of the new trading suspension policies.
"The 20 percent monthly repatriation limit remains a significant hurdle for investors that may be faced with redemptions, such as mutual funds, and must be satisfactorily addressed," the index operator said.
Remy Briand, MSCI's global head of research said in a conference call after the decision was announced that even though there had been moves by the Chinese government to improve market operations, it was still lacking in some areas.
The high number of voluntary suspensions also need to be brought down, Briand added. He told the call that 6-10 percent of the A-share universe was suspended at any given time, compared to an average of 0.2 percent across all emerging markets.
"The number of [A share] suspensions hasn't gone down significantly," he said.
Chinese stocks currently listed in MSCI's EM index are traded in Hong Kong or the U.S., which means the world's second-largest economy makes up only about one-fourth of the benchmark index, while projected full inclusion of A shares would bring that ratio to more than one third.
With about $1.5 trillion in assets under management tracking the index, China is keen to tap those funds as foreign investors search for returns outside their home markets.