By Emerald Yau, Head of Equity Index Product Management, Asia
FTSE China A50 Index – FTSE Russell’s China flagship index consists of the largest 50 A Shares companies – is getting some highly anticipated changes this year via a two-step upgrade: (1) constituents subject to foreign ownership limit (“FOL”), and (2) constituents subject to Northbound Stock Connect eligibility. These upgrades represent the first wave of enhancements planned for the FTSE China A50 Index ecosystem.
A positive step post consultation
FTSE China A50 Index made its debut more than 18 years ago and has become a widely used benchmark for investors to access China opportunities through A-Shares – securities of companies incorporated in mainland China and traded on China’s stock exchanges.
But 18 years is a long time, particular in emerging market where things can change quickly. China is of no exception. The country has transformed and has been moving towards a more stabilized, consumption-driven growth model in recent years.
In light of the development of China, FTSE Russell conducted a consultation on its China A Share index offering last October to ensure that our China A products continue to meet the requirements of index users. Based on market feedback, a decision was made to enhance the methodology of FTSE China A50 Index, including this year’s two-step improvements in March and June 2022 reviews.
March 2022: applying 28% FOL instantly improve investibility and diversification
As more international investors pay attention to China, the user base of this popular FTSE Russell flagship has gradually and substantially shifted towards international investors over the years from the original intent of serving China domestic clients at launch in 2003.
To improve the index’s investibility and tradability by an international investor, it became apparent of a need to bake in the foreign ownership limit into the index design. The decision of updating the FTSE China A50 Index and having its constituents to be subject to foreign ownership at 28% starting from the March 2022 review was a significant move for market participants.
The application of FOL also led to an important benefit in terms of industry diversification in the FTSE China A50 Index.
Given the nature of the China A-Share market – where large banks and financial services companies dominate – the Financials industry has always held the heaviest weight. However, the Financials industry weight has actually been falling over the past years, as China's economy develops and the non-financials types of companies gain in size. Consumers, Health Care, and Technology industries particularly gained exposure.
However, given there are only 50 constituents in the FTSE China A50 Index, even though the index industry exposure evolves similarly to the broader A Share market, the exposure in Financials especially stands out.
Additionally, the shares of large banks and financial services companies in China are liquid and typically process higher investability vs. the 28% foreign ownership limit. As a result these large financials companies together contribute to a heavyweight in the Financials industry.
By placing the 28% foreign ownership limit, Financials weight immediately dropped to 27% from 38% – representing a whole 11% weight reduction!
This 11% weight drop in financials was then spread to other industries, making the FTSE China A50 Index more diversified. Particularly, the weights in industrials, health care, and consumer discretionary, saw a meaningful increase post review – which is in line with where China is focusing to propel its growth. Noteworthy is that the Financials industry is now at a comparable weight to the consumer staples industry.
June 2022: screening with Northbound Stock Connect eligibility
The QFII, RQFII and Stock Connect schemes that provide international investors with much needed access to China's domestic assets have gone through a range of enhancements since their debuts. It is not unreasonable to believe the now-unified QFII/RQFII (the “QFIs”) and Stock Connect may eventually converge, making the accessibility fungible between the two schemes. But for now, we see Stock Connect continues to be the preferred route by international investors.
The FTSE China A50 Index currently consists of A Shares that are available to domestic investors as well as international investors via the QFIs and Stock Connect programs. Considering the popularity of the benchmark and the inability of smaller international investors to access via the QFIs, it was decided that all FTSE China A50 constituents shall be subject to Northbound Stock Connect eligibility starting from June 2022 index review.
This move essentially will transform FTSE China A50 Index to an important tradable subset of the FTSE Global Equity Index Series. It is our hope that the evolution could further boost adaptation by international investors, by opening doors to smaller international investors without access to QFIs, as well as by improving an investment manager’s trading process by removing pre-funding operational hurdles in the QFIs scheme.
Evolution while maintaining a transparent methodology and an established ecosystem
While the FTSE China A50 is evolving for the better, the index continues to be based upon a transparent, well-understood free-float market cap adjusted index methodology, which continues to lead to a highly predictable index composition.
Meanwhile, China A Share investors can easily gain to the market and manage risk via the rich financial ecosystem consisting of widely used index-linked financial products and index derivatives based on the FTSE China A50 Index.
Pairing with the evolutions happening this year (and more to come), the FTSE China A50 Index will only transform to be more attractive and user-friendly for today’s investor.
For more insights on China equities and other asset classes, subscribe to the blog.
© 2022 London Stock Exchange Group plc and its applicable group undertakings (the “LSE Group”). The LSE Group includes (1) FTSE International Limited (“FTSE”), (2) Frank Russell Company (“Russell”), (3) FTSE Global Debt Capital Markets Inc. and FTSE Global Debt Capital Markets Limited (together, “FTSE Canada”), (4) FTSE Fixed Income Europe Limited (“FTSE FI Europe”), (5) FTSE Fixed Income LLC (“FTSE FI”), (6) The Yield Book Inc (“YB”) and (7) Beyond Ratings S.A.S. (“BR”). All rights reserved.
FTSE Russell® is a trading name of FTSE, Russell, FTSE Canada, FTSE FI, FTSE FI Europe, YB and BR. “FTSE®”, “Russell®”, “FTSE Russell®”, “FTSE4Good®”, “ICB®”, “The Yield Book®”, “Beyond Ratings®” and all other trademarks and service marks used herein (whether registered or unregistered) are trademarks and/or service marks owned or licensed by the applicable member of the LSE Group or their respective licensors and are owned, or used under licence, by FTSE, Russell, FTSE Canada, FTSE FI, FTSE FI Europe, YB or BR. FTSE International Limited is authorised and regulated by the Financial Conduct Authority as a benchmark administrator.
All information is provided for information purposes only. All information and data contained in this publication is obtained by the LSE Group, from sources believed by it to be accurate and reliable. Because of the possibility of human and mechanical error as well as other factors, however, such information and data is provided "as is" without warranty of any kind. No member of the LSE Group nor their respective directors, officers, employees, partners or licensors make any claim, prediction, warranty or representation whatsoever, expressly or impliedly, either as to the accuracy, timeliness, completeness, merchantability of any information or of results to be obtained from the use of FTSE Russell products, including but not limited to indexes, data and analytics, or the fitness or suitability of the FTSE Russell products for any particular purpose to which they might be put. Any representation of historical data accessible through FTSE Russell products is provided for information purposes only and is not a reliable indicator of future performance.
No responsibility or liability can be accepted by any member of the LSE Group nor their respective directors, officers, employees, partners or licensors for (a) any loss or damage in whole or in part caused by, resulting from, or relating to any error (negligent or otherwise) or other circumstance involved in procuring, collecting, compiling, interpreting, analysing, editing, transcribing, transmitting, communicating or delivering any such information or data or from use of this document or links to this document or (b) any direct, indirect, special, consequential or incidental damages whatsoever, even if any member of the LSE Group is advised in advance of the possibility of such damages, resulting from the use of, or inability to use, such information.
No member of the LSE Group nor their respective directors, officers, employees, partners or licensors provide investment advice and nothing in this document should be taken as constituting financial or investment advice. No member of the LSE Group nor their respective directors, officers, employees, partners or licensors make any representation regarding the advisability of investing in any asset or whether such investment creates any legal or compliance risks for the investor. A decision to invest in any such asset should not be made in reliance on any information herein. Indexes cannot be invested in directly. Inclusion of an asset in an index is not a recommendation to buy, sell or hold that asset nor confirmation that any particular investor may lawfully buy, sell or hold the asset or an index containing the asset. The general information contained in this publication should not be acted upon without obtaining specific legal, tax, and investment advice from a licensed professional.
Past performance is no guarantee of future results. Charts and graphs are provided for illustrative purposes only. Index returns shown may not represent the results of the actual trading of investable assets. Certain returns shown may reflect back-tested performance. All performance presented prior to the index inception date is back-tested performance. Back-tested performance is not actual performance, but is hypothetical. The back-test calculations are based on the same methodology that was in effect when the index was officially launched. However, back-tested data may reflect the application of the index methodology with the benefit of hindsight, and the historic calculations of an index may change from month to month based on revisions to the underlying economic data used in the calculation of the index.
This document may contain forward-looking assessments. These are based upon a number of assumptions concerning future conditions that ultimately may prove to be inaccurate. Such forward-looking assessments are subject to risks and uncertainties and may be affected by various factors that may cause actual results to differ materially. No member of the LSE Group nor their licensors assume any duty to and do not undertake to update forward-looking assessments.
No part of this information may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior written permission of the applicable member of the LSE Group. Use and distribution of the LSE Group data requires a licence from FTSE, Russell, FTSE Canada, FTSE FI, FTSE FI Europe, YB, BR and/or their respective licensors.