Inclusion in the index marks a key victory for the Chinese government, which has been working steadily over the past few years to open up its capital markets, investors said.
Benchmark providers take into consideration the quality of regulation and supervision when deciding how to classify a country, but they do not screen individual companies for corporate governance issues when adding them to global benchmarks.
As with the IMF's SDR decision, the MSCI move carries more symbolism that practical import for now. It listed Saudi Arabia on its watch list for potential classification as an emerging market.
It was a historic day for Chinese financial markets yesterday with the nation's mainland-listed stocks gaining admission to the MSCI's indices after three unsuccessful attempts, paving the way for increased foreign investment in the years ahead.
The development punctuates an extraordinary period during which China has sought to enter the mainstream of worldwide finance while still maintaining a semblance of control over its markets.
Shares of iShares MSCI Frontier 100 ETF (FM) traded down 0.02% during trading on Tuesday, hitting $28.84. However, with the rapid advancement in technology and information flow, and with political will, we believe China is likely to reach full inclusion in worldwide indices. 270,839 shares of the stock were exchanged. iShares MSCI Frontier 100 ETF has a 52 week low of $23.90 and a 52 week high of $29.58.
"For global investors, while the inclusion will not trigger an immediate and wholesale change in their asset allocation, it will put Chinese equities on the map". The first link with Shanghai started in late 2014.
"These companies have the highest proportion of passive-index focused investors on their registry and these are the stocks that are likely to see the most selling as the global and regional passive funds re-allocate to the A-Shares".
Concerns about the ability of foreign investors to move freely into and out of A shares led MSCI to withhold its approval in previous reviews, though.
The Singapore Exchange (SGX) reported that "more than half of the stocks" listed on the benchmark Straits Times Index (STI) are reporting revenues to China.
However, observers said the small number of firms taking part - 222 large-cap firms will join initially meaning they make up just 0.73 per cent of the overall index - meant there would be little early impact. In Asia, Japan's Nikkei 225 index fell 0.5 percent, South Korea's Kospi lost 0.5 percent and the Hang Seng in Hong Kong dropped 0.6 percent.
These A-share stocks only account for 0.73 per cent of the index's weighting, based on a 5 per cent initial inclusion factor. Returns in the stock market may often mimic the amount of risk.
China has been gradually opening its A share market to foreigners, allowing them to trade selected stocks in Shanghai and Shenzhen through mechanisms linking those markets to Hong Kong.