MSCI had raised expectations it would accept China A-shares when it laid out a plan for inclusion earlier in the year, saying its close work with Chinese regulators had addressed many long-running issues.
Getting the green-light from MSCI would have boosted confidence in Chinese equities, which remain tempered after last summer's stock market crash, which had global repercussions.
However, on Tuesday, MSCI said investors preferred the index provider to take a more cautious approach, and cited capital mobility as one of its biggest problems.
An estimated $1.5 trillion (£1.1bn trillion) is benchmarked to its emerging markets index, to which the addition of A-shares would have had the largest impact.
This is the third year MSCI has decided against China's A-shares, despite China's efforts to be accepted into the fold and the fact that the A-shares market is not the world's second-largest by market capitalisation - outstripping Japan.
Catherine Yeung, investment director fo Asia ex-Japan equities at Fidelity International said:
"What's important to note is that while we have seen some significant improvements in terms of how foreign investors access domestic Chinese stocks, regarding the MSCI criteria that was set last year, a lot of it still needs to be fulfilled.
"MSCI said the inclusion of A-shares could occur within the next year, outside of the normal review period which falls every June. If we see further developments in terms of regulation and in terms of how we access the market as investors from a foreigner perspective, then indeed we could see inclusion.
"Any inclusion is likely to be gradual, perhaps beginning at 5 per cent, and inclusions can take years to be implemented. This is very much a long-term story."