Yesterday (Thursday) FTSE and Xinhua Financial Network’s joint venture rolled out the China 25 index - a new index of red chips, H, B and N shares for foreign investors and traders, which follows FTSE’s guidelines of adjusting for a free float and capping any one stock’s weighting at 10%. It directly takes on MSCI (the Morgan Stanley Capital International indices), whose China country index does not have that cap, which means a handful of giant stocks such as China Mobile can comprise over 50% of the index.

The New York Stock Exchange has also indicated its commitment to listing exchange-traded funds (ETFs) on the back of the China 25, which is expected to launch in mid-2002, says Mark Makepeace, CEO at FTSE. This will be the first China ETF globally.

“The problem with existing China indices is that if an investor just wants China, the index is dominated by China Mobile,” he says. This is not only a risk, but also means many institutions under US and European regulations are barred from overexposure to one stock.

The limiting of China Mobile and other major Chinese stocks to 10% of the index also changes the performance of the index, Makepeace notes. (See chart below.) He says the greater diversification has also led to better performance, based on a recent track record. MSCI’s China country index may be a good choice for active managers because it is easier to beat; passive managers will want to use the FTSE-Xinhua index. The 25 companies are based on market capitalization, and represent about 80% of the total tradable market available to foreigners.

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This summer, the JV hopes to announce other indices based on the A and B share markets. Fredy Bush, COO at Xinhua Financial News, notes the A share market is much larger, although in the long run the markets will merge. The two media companies formed a joint venture last year; FTSE is owned by the Financial Times, while Xinhua is majority-owned by Xinhua News Agency, a mainland Chinese organ. In the JV, FTSE calculates the indices and Xinhua acts as a distributor for mainland China clients.