Even if you have great servers, and every client is running top-notch hardware, most people don't have fast enough internet to communicate the information for tons of particles and objects. Perhaps if fiber internet becomes more common in the next decade we will start to see more "synchronized" physics in MMOs.

So lets say I want to make a mmo game for only clients who has:

1) High-end gaming computer system.

2) Internet speed that's over 30mb.

I know its about only 30% of the gamers out there..

but still can it work???

The clients hardware is pretty much a non issue these days (and in some parts of the world client bandwidth is a non issue aswell), the real problem is the server hardware and bandwidth cost and the tradeoffs you have to make.

The very core of MMO gameplay is to have a massive amount of players in the same world interacting with eachother, as bandwidth and hardware costs go down the most sensible route for MMOs to take is not to add fancy physics or high paced action gameplay(MOs will always be able to greatly outshine MMOs in that department), the sensible route is to make things more massively multiplayer since that is what MMO players want (if they didn't want that they would be playing MOs instead)

Cloth simulation can be done client side. It's purely cosmetic and doesn't really affect the world.

You could also do that with ragdolls. Once an entity is dead, it's position is no longer updated server side and the physics calculation of the ragdoll is done client side.

The downside is that the ragdoll couldn't interact with the rest of the world. Each player might see a slightly different ragdoll (depending on how deterministic the ragdoll was).

If, on the other hand, you wanted real network physics, that would have to be done server side (too easy to exploit if the client could update the world like that), and that's just not feasible for a massive instance.

Single player games, and most other multiplayer games, are quite deterministic in regards to how many entities can be in your area of interest and needing physics stepped, while on the other hand when you are looking at an MMO type game it is generally non deterministic as to how many actors can be in your area of interest... maybe 1, maybe 5, maybe 50, maybe 100.

So even though the cloth simulation would be run on the client side as purely cosmetic, you now have to account for how many instances are you going to run/step and if you are outside of that what are you going to do? If you only process cloth physics for N of the closest and replace the others with some type of static mesh or anim how is that going to look? Also what is the transition going to look like if the N closest are constantly changing (i.e. a large group meeting) and you have to swap between cloth physics and whatever your stand-in technique is... or are you just going to grind out processing of all entities regardless of the milliseconds needed? So it won't always be a technical decision either as it may technically work properly but on the flip side it could look really bad and/or hamper performance/frame rate therefore the game is better off without it.

Regarding physics that actually matter to gameplay that is really a separate topic in comparison to "fluff" physics.