Tale of a Chinese index provider

Citic Securities offers what China''s two exchanges have been unable to provide: a unified all-China stock index. Can it survive?

Chinese fund managers face the problem of how to benchmark their portfolios. Fed up with waiting for the Shenzhen and Shanghai stock exchanges to put aside regional rivalries and develop a unified index, Beijing-based Citic Securities has jumped into the fray itself.

Lacking a methodical way to compare risk-adjusted performance among different strategies, Citic Securities has developed its own family of indices, initially for in-house investments. But it has soon found its products in high demand. Currently 15 out of the 19 existing domestic fund management companies in China actively use Citic products to either structure or benchmark their portfolios.

The Citic Securities indices were developed according to internationally accepted standards devised by MSCI and FTSE. Like them, the Citic indices adjust for free float. The Citic Composite Index covers 60% of the quoted market value of all companies listed in the Shanghai and Shenzhen A-share markets.

In addition to the composite index, Citic offers a series of style indices, covering small, mid-size and large-cap stocks, in both the value and growth categories. The Citic family also comprises a series of sector indices, indices covering recent IPOs, tech and negative profit companies, and a series of fixed income indices and mutual fund indices.

The company claims dominance in index futures, which are gaining popularity as the Chinese government explores exchange-traded funds (ETFs) as a means to sell off shares in state-owned enterprises. Meanwhile, the exchanges themselves are keen on promoting ETFs, as open-end funds become more popular.

Fund managers say the problem with the indices promoted by Citic Securities, as well as those of its closest competitor, the Xinhua FTSE index family, is that they are not widely recognized. Awareness is poor because these indices are not published except in financial newspapers or on the sponsor's website. They say China needs its own version of the MSCI or the FTSE.

In terms of being able to raise its profile, Citic is worse off relative to its competitors.  For example, Xinhua, China's national news agency, is one half of the FTSE Xinhua JV and can do a better job of publicizing its indices abroad. The recently launched Shanghai SE 180, which is a competitor of the Citic Composite, has gained prominence under the patronage of the Shanghai Stock Exchange.

Gang Xu, director of financial product development at Citic Securities, says that because Citic positions itself as a competitor to Shanghai and Shenzhen, recognition from these exchanges will not be forthcoming. So Citic has to rely solely on its institutional customers to gain widespread recognition.

Xu notes Citic's indices have advantages over the exchanges' products. Fund managers have complained of technical glitches in the Shanghai and Shenzhen indices. For example, the Shanghai index is heavily weighted in favor of B-shares, which are closed to domestic investors.

The blue-chip Shanghai 180 hopes to address that problem, as it covers only A-shares. On another front, the Shanghai and Shenzhen exchanges are also in talks to develop a long-awaited unified index, the China 300. But Xu is not worried. He says the two exchanges suffer from government interference, while Citic Securities has more of free rein in picking companies to include in its indices.

Unlike Xinhua FTSE, the Citic Composite does not cap company weightings; instead it aims to represent the entire market and leave risk diversification to fund managers.

Xu says the degree of government intervention will determine whether multiple index vendors survive. "Without government regulation, our system could model itself on the lines of the American one, where a dozen indices happily coexist," he says. But whether regulators will make room for independents such as the Citic Composite to survive the eventual day when the two bourses cooperate on an all-China index remains unknown.

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