China Gets in the MSCI. Now Comes the Hard Part.

The China Securities Regulatory Commission stated that MSCI Inc.'s decision to include the nation's stocks in its benchmark equity indexes for the first time reflected global investors' confidence in China's economy and capital markets. The naysayers were quick to point out that just 222 large-cap shares will be included, accounting for a 0.73 percent weighting in the MSCI Emerging Markets Index. That's tiny considering China is the world's second-largest stock market.

I believe that it’s strategically important for China for several reasons, and officials need to use this as an opportunity to advance reforms in the nation's capital markets.

At its core, MSCI's decision is an acknowledgement of the significant progress China has made on reforms in the past year. Accessibility of the A-share market for global investors has been the key reason for previous rejections from MSCI, and the development of the Shanghai and Shenzhen stock connects have been important developments to overcome this hurdle. MSCI noted that "Institutional investors viewed the Stock Connect as a more flexible access framework compared to the QFII and RQFII regimes." CSRC Chairman Liu Shiyu has also taken steps to create a more robust regulatory regime, which has made the equity market more suitable for international institutional investors. Plus, this is more recognition of China’s growing influence in the world economy and financial markets, similar to the yuan's inclusion in the International Monetary Fund's Special Drawing Rights program last year.