Earlier this week, MSCI Inc. (MSCI - Snapshot Report) decided not to include China A shares on the MSCI Emerging Markets Index. The index compiler has decided to defer this decision until it sorts out outstanding issues with the country’s securities regulator. This decision comes as a temporary setback to China’s efforts to raise the standing of mainland capital markets and internationalize the yuan.

On the other hand, it is welcome for news for other countries whose stocks are listed on the index. This is because it banishes fears that capital would be lured away from such stocks.

Outstanding Issues

According to MSCI’s website, it will only include mainland shares on its indexes after it resolves certain outstanding issues. The company said it will form a working group with China Securities Regulatory Commission, the country’s securities regulator for this purpose.

Among the issues to be resolved were capital mobility, beneficial ownership details and restrictions on investment. The measured approach adopted by MSCI on including A shares has been praised by several market watchers and analysts.

Restrictions on Investment

Foreign investors still have to conform to restrictions on investment per the conditions laid down by authorities regarding the Shanghai-Hong Kong exchange link. The link provides investors with access to stocks listed on the mainland, as long as they have a brokerage account in Hong Kong.

However, foreign investors can purchase a maximum of net 13 billion yuan ($2.1 billion) of such shares per day. They are also subject to an aggregate quota of 300 billion yuan.

MSCI has said that it will collaborate with Chinese authorities to ensure that such quotas correspond to the amount of assets under management of investors. Close coordination with China’s authorities will hasten this process, the index provider said. However, announcement of the inclusion of A shares and implementation will be separated by a 12-month period.

Short-Term Setback

Most analysts believe that this setback for A shares is only short-term in nature. Even though the majority of market participants would have liked the inclusion to come much sooner, MSCI has sent out a clear signal. Fund managers would have to factor in the possibility of such an inclusion taking place before 2016.

In fact, China has already dealt with major concerns on market accessibility raised after last year’s MSCI review. Firstly, an announcement was made in November last year that shares bought via the exchange link will be temporarily exempted from capital gains taxes. Authorities have also reduced restrictions on having more than one broker. Additionally, they have also initiated a trial run of same day trading of select stocks.   

Five Beneficiaries

Following MSCI’s decision, the Shanghai Composite Index declined on Wednesday. It is clear that mainland shares will ultimately be included into MSCI indexes. This is expected to provide a short and sharp boost to China stocks.

For the moment, capital will not be diverted from stocks of countries which already find a place on MSCI indexes. Below we present five beneficiaries from MSCI’s decisions, each of which is located in countries included in the Emerging Markets Index

Korea Electric Power Corp. (KEP - Analyst Report) also known as KEPCO, is an integrated electric utility engaged in the generation, transmission, distribution of electricity and development of electric power resources in South Korea.

LG Display Co., Ltd. (LPL - Snapshot Report) primarily manufactures and sells thin film transistor liquid crystal display (TFT-LCD) panels. The company is based in Seoul, South Korea.  

Taiwan Semiconductor Manufacturing Company Limited (TSM - Snapshot Report) is the world's largest dedicated integrated circuit foundry, based in Hsinchu, Taiwan.  

Tata Motors Limited (TTM - Snapshot Report) is India's leading automotive manufacturer. The company also exports cars to other parts of Asia, Middle East, Europe and Africa.

Philippine Long Distance Telephone Company (PHI - Snapshot Report) is the country's principal supplier of domestic and international telecommunications services.

China’s A shares will probably be included into MSCI Emerging Market’s Index in the near future. However, the current decision makes things easier for stocks from other countries. This means they are likely to chalk up gains in the days ahead.