Standard & Poor's (S&P) and CITIC Securities (CITICS) are jointly developing two new China A-share market indices to be launched in early 2004.
Targeting both domestic and foreign investors, the new series hopes to provide the first widely used benchmark incorporating companies from both the Shanghai and Shenzhen bourses. If widely adopted, such a universal index could revolutionize performance measurement among China's fledgling funds management industry.
CITIC Securities as well as other domestic securities firms promotes its own universal A-share index, but it is not considered a standard benchmark. By teaming up with a global provider such as S&P, CITIC hopes to rise above the pack. For S&P, the partnership gives it a chance to take on global rival FTSE, which has a series of A-share indices in conjunction with Xinhua.
The S&P/CITIC A-Shares 300 will be a broad market index. It will act as a benchmark for the performance of the China A-share universe, as all listed companies on the Shanghai and Shenzhen stock exchanges will be eligible for inclusion. S&P/CITIC A-Shares 50 will contain 50 of the most investable (based on size and liquidity) stocks from the S&P/CITIC 300. This index will be tradable and is intended to form the basis for index products and trading tools such as Exchange-Traded Funds (ETFs), mutual funds and derivatives products. Both indices will be market cap weighted and free float-adjusted.
The S&P/CITIC indices will be the first in the China A-share market to be in line with the Global Industry Classification Standard (GICS), which is consistent with MSCI and S&P indices worldwide. At the same time, the index methodology will be adjusted to recognise the uniqueness of the China A-share market.
In addition the S&P/CITIC A-Shares 50 will also be the first major index player to offer a narrow-based investable index focusing on size and liquidity. This should help reduce tracking error and costs for producers of index-related products. The two companies feel that these features will distinguish them from FTSE/Xinhau, their primary competitor in the A-share index space.
"We are pleased to join our indexing experience and best practices with CITCS' deep local knowledge to develop index tools that are designed to meet the needs of both passive and active domestic investors, and that bring Chinese equities in line with markets around the globe for international investors," said Robert Shakotko, New York-based managing director of Standard & Poor's Index Services.
Wang Dongming, Chairman of CITICS adds, "CITICS and S&P are the leading brands in the indexing space for the domestic and international markets respectively. Our cooperation will not only accelerate the creation and development of index products in China but will also speed up the internationalization process for the domestic equity markets."
For S&P and CITICS, the timing of the A-share index effort has been prompted by the growing liberalization of China's capital markets. In particular, they feel that with the recent launch of the QFII scheme, and the entry of international investors in the A-share market, the need for accurate, transparent and globally comparable market benchmarks that meet global standards has increased.
"With our increased understanding of the region, and investors' growing demand for insight into the information about this emerging marketplace, we now feel that the time is ripe for S&P to enter China, a market that presents tremendous opportunities for both domestic and international investors as the regulatory environment continues to develop," says Shakotko.
Under the new partnership CITICS' existing indices will be upgraded and re-branded as S&P/CITIC. Initially however, the existing CITIC indices will continue to be calculated to allow sufficient time for investors to switch to the new benchmark.
Both parties will share the responsibility of providing data and licensing services to the financial market, while CITICS alone will be responsible for the day-to-day calculation of the indices and the dissemination of the real-time data to the market place.
S&P and CITIC will set up an independent Index Committee, comprised of representatives from each firm, to maintain the indices. This committee will seek advice from an advisory panel, made up of major index users from the finance and investment community in order understand their needs while structuring the index.
Commenting on S&P's growing indexing franchise in Asia, Glen Doody, vice president of S&P's Index Services says, "This agreement with CITICS represents a strategic expansion of Standard & Poor's presence in Asia's indexing arena, complementing our activities in Japan, Australia and Hong Kong where we maintain leading indices in conjunction with the principal exchanges in each of those markets."