Xinhua FTSE Indicies, Chinese Index Overview

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FTSE/FXI China Indices in Global PortfolioFTSE/FXI China Indices in Global Portfolio

Shelly Shi, R&D DirectorShelly Shi, R&D Director2727 November, 200November, 20077

Indexing Strategies Asia 2007, Hong KongIndexing Strategies Asia 2007, Hong Kong

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Contents

Global Trend

China in FTSE Indices

China Investments Through Index Products

Next Moves

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- IMF Outlook

Data source: International Monetary Fund - World Economic Outlook, October 2007

Emerging markets now the major engine of global growth

5.6 5.6 5.4 5.1 ASEAN-4

8.0 8.4 9.1 8.6 South Asia

10.0 11.5 11.1 10.4 China

8.3 9.2 9.3 8.7 Emerging Asia

2.2 2.5 2.9 2.5 Advanced Economies

4.8 5.2 5.4 4.8 World

2008200720062005

China is making the largest contribution based both on purchasing power and on market prices

Global Trend

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Performance

data source: FTSE

Emerging Asia Pacific markets have witnessed strong gains in the past two years.

Emerging Asia Pacific includes seven secondary emerging and two advanced emerging countries. China, India, Indonesia, Malaysia, Pakistan, Philippines, Thailand are classified as secondary emerging countries

South Korea and Taiwan are still considered by FTSE to be Advanced Emerging, but moving towards Developed status

FTSE methodology determines country classification based on 25 criteria covering both market quality and economic factors

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China has been the star performer during the same period with FTSE China Index greatly outperforming FTSE Emerging Asia Pacific Index.

Performance

data source: FTSE

Emerging Asia Pacific markets have witnessed strong gains in the past two years.

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Chinese Stocks

A-shares(RMB) (1500)

65.3%

Domestic markets Hong Kong market

B-shares(USD/HKD) (108)

0.8%

H-shares(HKD) (144)

21.5%

Red Chips(HKD) (91)

12.4%

Shenzhen Vanke (B)Huadian Energy (B)

PetroChina (A)Bank of China (A)

PetroChina (H)ICBC (H)

China MobileCNOOC

A-shares in domestic markets:

AUM of Index-related funds (including open and closed-end funds and ETF) was RMB 196.2 trillion - 6% of the AUM of total funds (RMB 3,241.2 trillion).The A-share market almost tripled in the past two years, primarily driven by excess liquidity which in part due to trade surplus.Distortion to markets and stock prices due to lack of short-selling mechanisms and derivatives products

A distinguish feature of the Chinese equity markets is its various share classes with different listing and ownership characteristics.

– domestic investors

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0

1,000

2,000

3,000

4,000

1998 1999 2000 2001 2002 2003 2004 2005 2006 20070%

5%

10%

15%

20%

Index FundsTotal Funds

%

Domestic Index Funds

Chinese Stocks


65.3%



0.8%

H-shares(HKD) (144)

21.5%

Red Chips(HKD) (91)

12.4%




China MobileCNOOC

Domestic Investors

Apr 2006: QDIIFeb 2001

– domestic investors

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Chinese Stocks – international investors


65.3%


International Investors (outside China)

Prior to December 2002


0.8%

H-shares(HKD) (144)

21.5%

Red Chips(HKD) (91)

12.4%

After December 2002 whenQFII was implemented

Market Cap Coverage in FTSE Global Equity Index Series:

- Total market cap: 3.9%- Investable market cap: 1.8%

China A-shares excluded from FTSE GEIS as

they can be held by domestic

investors only.




China MobileCNOOC

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2002 2003 2008 20092004 2005 2006 2007

QFII quota (USD bn)

1.275

4.070

8.645

9.995

0

2

4

6

8

10

2004 2005 2006 2007

China A-shares must meet criteria to gain inclusion:Direct investment by overseas investors - a substantial increase in QFII investmentNo significant exchange control which prevent timely repatriation of capital or dividend

Dec 2002: QFII was implemented

Mar 2004: FTSE China Watch List published

Nov 2003: Market Consultation Survey sent from FTSE

Possible China A-shares inclusion in FTSE Global Equity Index Series as Secondary Emerging


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QFII and QDII

Trade Surplus

Excess liquidity & limited investment channels

PBOC issue more RMB

Forexreserve

Skyrocketing equity market

0

100

200

300

400

500

600

2001 2002 2003 2004 2005 2006 20070

500

1,000

1,500

2,000

Capital Account (USD billion) Current Account (USD billion) Forex Reserve (USD billion)

0

50

100

150

200

250

300

Jun-01 Dec-01 Jun-02 Dec-02 Jun-03 Dec-03 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07

China Domestic Markets Performance

China Balance of Payment and Foreign Reserve

Dec 02 - QFII Jun 06 - QDII

Trade Surplus Jump

Skyrocketing equity

market

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A-shares0.0%

B-shares0.1%

H-shares2.4%

Red Chips1.4%

Non ChineseStocks96.1%

ChineseStocks3.9% A-shares

6.9%

B-shares0.1%

H-shares2.3%

Red Chips1.3%


ChineseStocks10.5%

FTSE China Watch List

FTSE China Watch List includes China’s A-shares, B-shares, H-shares and Red Chips. If A-shares were included in FTSE GEIS, the market cap coverage of Chinese stocks would increase from 3.9% to 10.5% (total market cap) or from 1.8% to 4.4% (investable market cap).

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A-shares2.4%

B-shares0.1%

H-shares2.4%


Red Chips1.3%

ChineseStocks6.2%

FTSE China Watch List (continued)

A-shares0.0%

B-shares0.1%

H-shares2.4%

Red Chips1.4%


ChineseStocks3.9%

However, since QFIIs are restricted to holding up to 20% of the shares in a China A-shares company, a maximum of 20% of the A-shares market cap is used and only the stocks large enough will be included in the FTSE GEIS. Therefore, based on the FTSE China Watch List, the market cap coverage would instead increase from 3.9% to 6.2% for total market cap and from 1.8% to 2.2% for investable market cap.

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FTSE Xinhua Index SeriesQDII

QFII

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Direct Investment Local securities: B, H and Red Chip sharesAfter Dec 2002, A shares investment through QFIIUS-listed ADRs (American Depository Receipts)Derivatives such as futures, options and warrants

Indirect Investment Closed-end mutual fundsOpen-end mutual fundsStructured productsETFs (exchange traded funds)

China Investments

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Using China index products

BenefitsPure China exposure with distinct asset classesInternational diversification Simple and easy to operateLow fees

RisksChina is at the higher end of risk spectrumCurrently high P/E ratio Single country not broad enough QFII limitation for A-share related index

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China index products examples


65.3%



0.8%

H-shares(HKD) (144)

21.5%

Red Chips(HKD) (91)

12.4%

FXI China A50FXI 200 IndexFXI All-Share Index

FXI China B35 IndexFXI B All-Share Index

FXI China 25 IndexFXI Hong Kong Index

5 on-shore ETFs linked to SZ100, SZ small cap, SSE50, SSE180 and SSE Dividend.iShare FXI China A50 ETF (2823.HK) iShare FXI China 25 ETF (FXI.US) (FXC.L)SSE50 ETF (1309.JP) Hang Seng FXI China 25 ETF (2838.HK)WISE CIS300 ETF (2827.HK)

ETFs

SG SSE50 call warrants & JP Morgan FXI A50 tracking fund call warrants listed in SGX19 call warrants linked to FXI A50 tracker fund listed in Hong Kong in 12 March 2007

Warrants

SGX FXI A50 Index future listed in Singapore FXI China 25 futures listed in Hong KongUpcoming CSI300 future (on-shore)

Futures

Indices

A variety banking products linked to FTSE/Xinhua China 25 Index and FTSE/Xinhua China A50 Index

Structured Products

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Next moves – QDII expansion and others


65.3%



0.8%

H-shares(HKD) (144)

21.5%

Red Chips(HKD) (91)

12.4%

Domestic Investors

Aug 2006: QDII

International equity markets

(not just Hong Kong)

KoreaChina-related stocksAustraliaSingaporeTaiwanIndiaBlue chips etc

Feb 2001

May 2007: QDII expansion

QDII related indices, such as:FTSE Xinhua Hong Kong Index – QDII investment in HKFTSE ST China Index – Chinese stocks listed in in SingaporeThe global indices customized for QDIIs

Non cap-weighted indices such as fundamental indexQFII quota is likely to be increased, perhaps tripled. More offshore structured products will be developedOthers such as AH premium indices and short ETF such as ProShares UltraShort FTSE/Xinhua China 25 (FXP.US)

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Wrap-ups

Global Trend


China Investments Through Index Products

Next Moves

Shelly ShiShelly [email protected]@xinhuaftse.com

(8621) 6113 5920(8621) 6113 5920

Thank youThank you

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Xinhua FTSE Indicies, Chinese Index Overview