Index Funds Make Strong Debut in China
By Yi Zheng, Ph.D. | October 14, 2003

By Yi Zheng, Ph.D. - Special Correspondent to IndexUniverse.com

China - October 5, 2003.  Index funds have found a burgeoning new market in China, which many consider the world’s fastest developing capital market.  In the last year alone, China has developed six index funds using a variety of benchmarks and including subadvisory arrangements with leading global index managers such as BarclaysGlobal Investors. The new funds are drawing interest from both Chinese institutional investors and retail investors.

In little over a month (July 11, 2003 to Aug 22, 2003), China’s Boshi Fund Management Company raised about RMB 5.1 B for its newly launched Boshi Yufu index fund, which has been the largest initial public offering for a mutual fund in China. This stock index fund, formally launched on Aug 26, 2003, was the recipient of attention from Chinese private investors, whose investments accounted for 61.55% of the total capital raised. It is the first index fund benchmarked to the Xinhua FTSE index, which tracks the largest 200 firms listed on both the Shanghai and Shenzhen stock exchanges. FTSE Xinhua is a Hong Kong incorporated joint venture between FTSE and Xinhua Financial Network in China, and it has a range of broad benchmarks and investable subsets geared for both local and international investors.   The Boshi Yufu Index Fund is the first index fund encompassing both Shanghai and Shenzhen exchanges. Compared to other index funds that are indexed to just one of the two stock exchanges, many observers think the Boshi Yufu fund offers more complete coverage of China’s stock markets.

Many of China’s first index funds used the Shanghai Stock Exchange’s Shanghai SE 180 Index as the benchmark. For example, China’s very first index fund, Huaan Fund Management Company’s Huaan ShangZheng 180 index fund, was funded by RMB 3.1 B raised during the period of Oct 18, 2002 to Nov 8, 2002. The fund invested in at least 120 stocks that are listed in the Shanghai Stock Exchange’s Shanghai SE 180 index, with the rest in the Chinese bond market. Early in 2003, China’s Tiantong Fund Management launched another RMB 2 B Tiantong 180 index fund, which was raised from Feb 10, 2003 to Mar 3, 2003, and tracked Shanghai Stock Exchange’s Shanghai SE 180 index. It will invest at least 20% of its capital in bonds.

The first index fund tracking the Shenzhen Stock Exchange is the Rongtong Fund Management Company’s first stock index fund that was founded on Aug 26, 2003. The Shenzhen Stock Exchange’s 100 index, since its inception on Jan 2, 2003, has had a performance since inception of 9.45% as of Aug 22, 2003.

China’s Fullgoal Fund Management Company is working with the Beijing-based CITIC Securities Company to develop a stock index fund to track the CITIC Composite Stock Index. The CITIC Composite Index, developed by CITIC Securities Company in 2000, includes only the A-share stocks that have the largest market capital and best liquidity in each industry. The market capital of CITIC Composite Index accounts for 60% of total market capital in China’s Shanghai and Shenzhen A-share Markets.

Innovation is not limited to equity indexing.  Recently on Aug 15, 2003, Changsheng Fund Management Company started raising a Changsheng CITIC bond index fund, the first bond index fund which is indexed to CITIC’s China Total Bond Index.

In China’s 6-year old mutual fund industry, index funds are the latest attempt at innovation, but clearly not the last.   In terms of performance, index funds have held their own against comparable investment funds available in China. We can expect more funds launched, including ETFs in the coming months and years. Furthermore, international investors can access Chinese securities through China oriented index funds available in Hong Kong, and later this year, through a NYSE-listed ETF based on the FTSE Xinhua China 25 Index.