SHANGHAI, June 15 (Reuters) - China stocks reversed early losses and rose more than 1 percent by midday on Wednesday as investors quickly shrugged off MSCI's decision not to add mainland Chinese shares to one of its key benchmark indexes.
Traders said Chinese investors had already been bracing for a "no" decision, as reflected by Monday's market tumble of more than 3 percent.
Index provider MSCI Inc said on Tuesday that Beijing had more work to do in liberalising its capital markets before it could add Chinese A shares to its emerging markets index, which is tracked by $1.5 trillion of managed assets.
With the MSCI decision now in the rear mirror, investors are focusing again on China's struggling economy and the potential fallout for global growth and financial markets if Britain votes to leave the European Union next week. Europe is one of China's biggest export markets.
The blue-chip CSI300 index jumped 1.4 percent, to 3,119.76 points by lunch time, while the Shanghai Composite Index gained 1.5 percent, to 2,885.78 points. They had opened roughly 1 percent lower as some investors who had clung on to hopes of MSCI inclusion unwound their bets.
Shenzhen's start-up board surged nearly 4 percent.
In Hong Kong, both the Hang Seng index and the Hong Kong China Enterprises Index added 0.5 percent. The MSCI emerging index already includes some Chinese H shares listed in Hong Kong.
The MSCI decision comes a year after China's stock markets went into near-meltdown after a speculative rally burst. Main indexes plunged some 30 percent in a month, wiping out nearly $4 trillion in market value at one point and triggering a massive and unprecedented government rescue that has yet to be unwound.
Chinese markets have attempted a few rallies since then, but overall levels are still not much above their mid-2015 lows and weak trading volume highlights continued investor pessimism.
"Regarding MSCI, most retail investors in China don't really care. And for institutions, their expectations of an inclusion have been greatly reduced since the market crisis last year," said Charles Wang, Shenzhen-based Chairman of Appleridge Capital Management Co.
"Failing to be included this time is not necessarily a bad thing. It can prod the government to improve market mechanisms and push reforms."
China's securities regulator said on Wednesday that MSCI's decision won't impact the reform and opening process of the country's capital markets, adding that any global benchmark index that doesn't include A shares is "incomplete".
"Even if A shares are included, it would still just be a symbolic event. The real impact would be limited," said Shen Weizheng, a fund manager at Shanghai-based Ivy Capital.
"My biggest concern now is China's economy. After strong stimulus previously, the government seems to have suddenly tightened the liquidity tap. I'm afraid the economy will loose steam."
All main sectors in China rose on Wednesday, with small-caps leading the gains.
David Dai, investor director at Nanhai Fund Management Co, said his hedge fund has been bargain hunting on Wednesday morning and over the past few sessions, taking advantage of market anxiety.
"Many stocks have fallen a lot recently, and worth buying. Now that MSCI doesn't include A shares, we just play by our own rules in China," Daid said.
But Shanghai-based hedge fund manger Zhou Liang said the rally in small-caps was not sustainable, because they're still much more expensive than blue chips.
"The bear market in China A shares will persist for several years," he predicted.
Reporting by Samuel Shen and Elias Glenn; Editing by Kim Coghill