Global index provider FTSE has recently formed a joint venture with Xinhua Financial News, a newsagency under the Chinese government, to create a series of indices tracking the Chinese stock market by March 2001. Called FTSE/Xinhua Index Limited (FXIL), the 50:50 joint venture company is hopeful that its new indices will be used as performance benchmarks for overseas derivative traders, index fund managers and exchange traded funds investing in the Chinese market.
Currently there are about 20 closed-end funds in China tracking the domestic investor-only A share market. As a response to market needs, Xinhua recently also introduced a Xinhua Composite Index of 400 Chinese companies listed on the A board.
While unable to comment on the likely stock composition of the new indices, the joint venture partners say they will "build on the success of this index" by developing further indices for international investors in China.
Mark Makepeace, FTSE's chief executive officer, says all stocks in the indices will be free float adjusted and will be classified according to FTSE's global stock classification system. He adds that exchanges in the region and about six fund managers in Hong Kong have approached FTSE, expressing interests in the new indices. "There's no shortage of people wanting to create products of indices. What we focus on is the long-term future in this. We believe from this relation we have an excellent chance of becoming the leading index provider for the China market," he says.
The joint venture announcement came after the decision by Hong Kong Exchanges and Clearing (HKEx) yesterday to develop futures and options contracts based on the MSCI China Free Index in the next three months. But Makepeace is unconcerned about the clash of timing because the FTSE/Xinhua indices will be usable by domestic as well as international investors.
Opening up the A share market to foreigners
Currently foreign investors can only invest in the B share market in China, which has 111 stocks listed, compared to the A board, which has more than a thousand stocks. Makepeace adds that once the Chinese government opens up its A share market to foreigners, as he expects the government will do so soon, domestic indices will become far more important than the international indices currently following the Chinese market. He expects those indices will be impacted dramatically. "FTSE and Xinhua decided not to just to try to promote that sort of indices as a substitute for the real thing. We believe we have a long term partnered future in China with this Xinhua joint venture," he says.
After conquering the major markets in Europe and launching a major index in the US with Frank Russell recently, FTSE is taking on MSCI in Asia with gusto. First it won the fight in Hong Kong to be used as a benchmark index for the city's new pension funds system. It is also opening a Pacific region office in Hong Kong next month.
MSCI, on the other hand, is yet to find a replacement for John Fildes, former executive director of MSCI in Hong Kong, who left to head the tech division of the company a few months ago. The company's Singapore office says no one is currently responsible for the company's index business in Asia.