The index giant will add 222 China A Large Cap stocks — including Bank of China and Tsingtao Brewery — on a gradual basis beginning next year. The review is the fourth straight year MSCI has considered adding the mainland-traded stocks, known as A-shares in China.
Corporate governance is a particular bugbear as many of the 222 companies are large state-owned enterprises, said Kevin Carter, CEO of Big Tree Capital and founder of the Emerging Markets Internet and Ecommerce ETF.
"You have all of these enormous state-owned banks, the four big policy banks, the oil companies, and these are really not run like traditional Western companies," Carter said.
"These companies are filed with inefficiencies, they are filled with conflicts of interest and they are frequently filled with fraud. Adding more of that, even though it's just a small amount, I don't think it helps helps investors," he said, adding that it was not a problem unique to China but also to markets dominated by such mega companies, like Brazil.
MSCI had previously left the A-shares out of the EM (emerging markets) index but it relaxed its investment criteria in March in a bid to address concerns on capital repatriation and suspended stocks.