* MSCI has slimmed down proposal to include 169 Connect stocks
* Investors, sources see greater likelihood of inclusion in 2017
* BlackRock says "supportive of" general benchmark inclusion
* Some investors still spooked by capital outflow curbs
By Michelle Price
HONG KONG, April 24 (Reuters) - The chances of MSCI Inc adding China-listed shares to its global index have risen significantly since it proposed to cut the number of companies to include, investors say, but capital controls and market access snags may still pose a hurdle.
New York-based index provider MSCI will announce in June if it will add yuan-denominated Chinese shares, or A shares, to its Emerging Markets Index, a move that could draw up to $400 billion into China stocks over the next decade.
MSCI last year declined for the third time to include mainland-traded shares to the benchmark, tracked by around $1.5 trillion in assets, saying more had to be done to open up the country's tightly-controlled market.
The index provider has now narrowed the gap between China and global asset managers by proposing a smaller slate of stocks and confining them to large-cap companies accessible to foreign investors via a trading link with Hong Kong.
"Certainly, in terms of the challenges China poses with respect to equity market access, this proposal does go some way to addressing those concerns," said David MacKenzie, head of Asian Equity Management at Schroders. "I'd be very surprised if they didn't push it through this year."
BlackRock - MSCI's largest client - said in a statement it was "supportive of" China A-share inclusion in global benchmarks but did not comment on the timeline or MSCI's new proposal.
MSCI said last June China needed to allow foreign investors to freely repatriate capital under its cross-border Qualified Foreign Institutional Investor (QFII) investment scheme.
It also wanted the country to scrap a rule requiring foreigners seek regulatory approval before launching investment products that include A shares, and said it wanted to see fewer long-term share suspensions.
Chinese regulators and benchmark providers have been in discussions for several years to smooth out market access issues, but have reached a deadlock over the last remaining hurdles, said two people briefed on the matter.
QUALITY OVER QUANTITY
One of the people said MSCI was working around these last issues by reducing the proposed selection of 448 stocks to 169.
"This is a bit of negotiation with the investors on one side telling MSCI what they want to see, and the Chinese regulators on the other side saying this is what they can offer," said Daniel Morris, senior investment strategist at BNP Paribas Investment Partners.