FTSE Emerging incl. China Overseas non-r/qfii GDP Weighted Index Do you weight for the China A-shares inclusion? As the opening up of the Chinese equities market continues, international market participants are considering the effects of the re-classification of China s market status and the inclusion of China A-shares in global benchmark indexes. About the Index The FTSE Emerging incl. China Overseas non-r/qfii GDP Weighted Index has been created to prepare market participants for the future inclusion of China A-shares in FTSE s standard indexes and reflect the economic importance of China as opposed to the size of its equity market. Index Name FTSE Emerging incl China Overseas non-r/qfii GDP Weighted Index Underlying Universe FTSE Emerging Index FTSE China A Index FTSE China Overseas Index China s share of global GDP Compared to the traditionally used market capitalisationweighted indexes this index provides an alternative way to weight companies. The China A-share component is adjusted by GDP factor rather than market capitalisation to reflect the economic importance of China as opposed to its equity market size, thereby overcoming the perceived concentration risks in capitalisation-weighted indexes. The other emerging market countries are also weighted by GDP and subsequently the constituent companies make up those allocations based on their free float adjusted weights. Technical details Methodology The five year GDP forecasts at Purchasing Power Parity (PPP) published by the International Monetary Fund (IMF) in September prior to the annual review date determine the GDP weighting Objective The indexes have been designed for use as performance benchmarks or for the use in the creation of index tracking products Available currencies USD, EUR, GBP, JPY and AUD Classification The indexes are calculated in accordance with the Industry Classification Benchmark (ICB), the global standard for industry sector analysis Review dates Quota weights are adjusted quarterly during periodic reviews in March, June, September and December Transparent The indexes use a transparent, rulesbased construction process. Index rules are freely available on the FTSE website History History available from 16 March 2001 ftserussell.com 1
FTSE Emerging incl. China Overseas non-r/qfii GDP Weighted Index structure FTSE Emerging Index FTSE China A Index (A-shares) Weight by GDP FTSE China Overseas Index (N-shares) FTSE Emerging incl. China Overseas non-r/qfii GDP Weighted Index The GDP Weighted Index consists of the FTSE Emerging Index, FTSE China A Index and FTSE China Overseas Index (N-Shares). With the inclusion of the main overseas Chinese share classes, the index captures the performance of Chinese companies which may be excluded by standard index methodologies. This innovative approach also means that important Chinese internet companies with U.S. listings such as Alibaba and Baidu are represented in the index, providing users with an accurate representation of the global China opportunity set. Index uses As the index is constructed of companies in emerging markets, China A-shares and N-shares, each weighted by GDP, it may be used by participants interested in the breadth of emerging markets and incrementally increasing exposure to Chinese companies over time. Accessibility of the China A-shares market Under the current regulations in the People s Republic of China (PRC), foreign investors and institutions are only allowed access to the local Chinese market via the two official quota schemes called, Qualified Foreign Institutional Investors (QFII) and Renminbi Qualified Foreign Institutional Investors (RQFII). QFII refers to a number of large financial institutions known as Qualified Foreign Institutional Investors who have obtained a QFII licence and approved quota to directly invest in A-share equities listed on the Shanghai and Shenzhen exchanges using offshore currency accounts. After obtaining the licence, the investors would need their investment quota approved by the State Administration of Foreign Exchange (SAFE) before they can invest in the local Chinese market. RQFII refers to the Renminbi Qualified Foreign Institutional Investors program which launched at the end of 2011. It is a modified version of QFII that facilitates foreign investment in the mainland via offshore Renminbi (RMB) accounts. RQFII participants can invest in the same range of investment products as QFIIs. London, Singapore and Paris have joined Hong Kong as the offshore markets allowed to use Renminbi to invest in Chinese securities under the RQFII scheme. About FTSE in China FTSE is the leading international provider of Chinese indexes With over 13 years of experience developing China market indexes, FTSE s China benchmarks have become globally recognised by investors and ETF issuers The leading measures of the China equity market and the natural choice for creating China-themed investment products In 2014, FTSE expanded its range of China benchmarks with the launch of the FTSE China Global R/QFII Index Series, a series of benchmarks providing market participants with choice of how to include China A-Shares in global benchmarks FTSE operates from 14 global offices, including two locations in China (Shanghai and Beijing) and our Asia-Pacific regional hub in Hong Kong Voted Best Beta Index Provider in the Asset Asian Awards Private Banking, Wealth Management and Investment Awards 2014 2
GDP weighting of emerging markets From time to time the weighting of certain countries within capitalisation-weighted equity indexes may diverge significantly from those countries share of global GDP. GDP-weighted equity indexes break the link between country weightings and market size by setting country weightings in proportion to GDP, rather than the aggregate of individual companies (and therefore countries ) market capitalisations. There is a tendency for growth markets to be underweight in traditional indexes when their capital markets are less developed or less open to foreign investors compared with developed markets. There is also a potential for capital market catch up in large emerging economies, which can be seen when comparing market capitalisation of a market or country by percentage of GDP. Developed markets often trade at a multiple to their respective GDP while emerging markets are at a fraction of their GDP. As emerging markets, such as China and India, implement policies and reform, and further develop trading infrastructure their capital markets have potential to represent to their actual economic size. 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Market Cap as a % of GDP Developed Emerging Frontier 180% 160% 140% 120% 100% 80% 60% 40% 20% 0% United States Japan Germany United Kingdom Market Cap as a % of GDP Australia Switzerland China India Indonesia Mexico Turkey Source: World Bank, data as at December 31, 2012 Chinese equities definitions Share Type Definition Included in Index? A-Shares Chinese companies incorporated in mainland China and listed on the Shanghai or Shenzhen exchanges. Denominated in RMB. Available to foreign institutional Yes investors through quota schemes B-Shares Chinese companies incorporated in mainland China and listed on the Shanghai or Shenzhen exchanges. Denominated in HKD or USD and available to foreign investors Yes H-Shares Chinese companies incorporated in mainland China and listed on the Hong Kong Stock Exchange Yes N-Shares Chinese companies listed on the New York Stock Exchange or NASDAQ Exchange Yes Red Chips State owned Chinese companies incorporated in mainland China and listed on the Hong Kong Stock Exchange Yes P-Chips Chinese companies listed in Hong Kong and incorporated in Bermuda, Cayman Islands or British Virgin Islands Yes S-Chips Chinese companies listed on the Singapore Stock Exchange Yes 3
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