ConsultationC
lt ti on Potential
P t ti l
Methodology Enhancements to the
MSCI China A Index
February 2009

Overview

The MSCI China A Index is currently constructed based on a methodology
similar to the previous MSCI Standard Index Series, targeting for index
inclusion of 65% of the domestic free float-adjusted market capitalization ineach industry group. In addition, the largest 25 securities based on free floatadj sted market capitalization
adjusted
capitali ation are systematicallys stematicall included
incl ded in the index
inde−This sampling approach leads to non-exhaustive coverage, with some sizable
companies not being included−

In addition, the target 65% coverage in each industry group results in a multi-cap
index composition

MSCI Barra is currentlyy consulting
g on a ppotential enhancement to the MSCI
China A Index methodology which would target exhaustive representationand non-overlapping size segmentation of the investable universe



The p
proposedpenhancement would be built on a methodology
gy similar to the
MSCI Global Investable Market Index (GIMI)© 2009. All rights reserved.

2

Significant
gMarket Changes
g in the A Shares Market

USA (2005 - 2008)

Mark
ket Representtation

China A (2008)

China A (2005)% of Total Number of Securities
Data as of June 30, 2008

© 2009. All rights reserved.

3

IPOs of Sizeable China A Securities 11 out of the 15 largest China A share companies were not listed before 2006,
2006
which accounts for more than 44% of the total full market capitalization.
Top 15 Securities
Name

PETROCHINA CO A
ICBC ACHINA CONSTRUCTION BK A
CHINA LIFE INSURANCE A
BANK OF CHINA A
CHINA PETRO & CHEM A *CHINA SHENHUA ENERGY A
BANK OF COMMUNICATIONS A
PING AN INSURANCE A
CHINA MERCHANTS BANK A *ALUMINUM CORP OF CHINA A
CHINA RAILWAY CONST A
CHINA YANGTZE POWER A *CHINA CITIC BANK A
CITIC SECURITIES CO A ** IPOed prior to 2005

Company Full
Mcap (USD mn)

Full Mcap
Weight278,611
173,932
126 087
126,087
102,548
98,19892,464
48,87634,01631,033
26,39921,47921 283
21,283
20,20920,157
17,463

12.9%
8.1%
5 8%
5.8%
4.8%
4.6%
4.3%
2.3%
1.6%
1.4%
1.2%
1.0%
1 0%
1.0%
0.9%
0.9%
0.8%

IPO Date
11/5/2007
10/27/2006
9/25/2007
1/9/2007
7/5/2006
8/8/2001
10/9/2007
5/15/2007
3/1/2007
4/9/2002
4/30/2007
3/10/2008
11/18/2003
4/27/2007
1/6/2003

Market caps are in USD million. Data as of December 31, 2008

© 2009. All rights reserved.

4

Summaryy of ProposalpThe transition of the current MSCI China A Index to a methodology similar to
the GIMI framework would provide exhaustive coverage of the large and mid
midcap segments of the universe by targeting a coverage range around 85% of
the free float-adjusted market capitalization−

The minimum size reference cut
cut-off
off will be similar to the MSCI Emerging Market(EM) cut-off−

In balancing the size integrity and coverage representation, priority will be given to
ensure a minimum free float market cap coverage of 80-90%

We do not propose, but reserve the option to construct a non-overlapping
China A Small Cap Index in the future

Bottom up samplingby industry groups+ top 25 securities
by free float mcap

Current Methodology

Enhanced Methodology

MSCI China A Index(65%)

MSCI China A Index(85%)

Large Cap (70%)

Mid Cap (15%)© 2009. All rights reserved.

5

Small Cap (14%)

Exhaustive coverage with
non-overlapping size segmentation

Transition Plan

If adopted,
adopted the MSCI China A Index would be transitioned to the enhanced
methodology in one single phase as of the close of May 29, 2009

Please note that the potential enhancements discussed in this consultation
may or may not be adopted in whole or in part and this consultation may or
may not result in any changes to the MSCI China A Index© 2009. All rights reserved.

6

Proposed Enhancements© 2009. All rights reserved.

7

Key Summary between Current and Proposed
Methodologies
Current Methodology

Proposed Methodology

pp
Approach

Bottom up sampling approach targeting 65% free
float mcap
pppresentation at industry
yg
group
p + topp 25
securities based on free float mcap

Exhaustive top down approach targeting a free float
mcap coverage of 85%

Size Segmentation-

Index Construction

Style Segmentation
Min Size
Liquidity Screen
Min Free Float

Standard (Large + Mid), and Small Cap targeting
respectively 85% and 99% of investable universe
respectively
Value and Growth
Subject to a full mcap cutoff derived by the global EM
RMB5.75b (USD 841m) free float mcap
min size reference (USD 1,190m) but with a priorty
for market coverage of 80%-90%
Minimum Annualized Traded Value Ratio (ATVR) of
ATVR of 15% for EM and Market Relative ATVR
15%
15% (except large companies with a free float
15% (except if a security's free float mcap > 1.8 times
market capitalization ranking at the top 25)
the Market Size Segment cutoff)

Index MaintenanceR b l
Rebalancingi
F
Freq
OngoingAnnual Index Review in May;
Semi-annual Index Review in May and November;
Quarterly Index Review in February, August andQuarterly Index Review in February and August
November
Corporate events implemented as they occur based on MSCI Corporate Event methodology© 2009. All rights reserved.

8

Use of Samplingp g Approachpp
at Initial Construction
 At the initial construction,
construction a sampling approach allows the index to better
capture the diversity of business activities in the China A shares market.
MSCI China A under sampling framework

Sector Weights - 2005

Equity Universe

Utilities

7%

Telecommunication …

2%

9%

3%
19%
19%

Materials
6%

Information Technology

7%
22%

Industrials
3%

Health Care

4%

Financials

11%

Energy

24%

4%

14%

5%
6%
7%

Consumer Staples

13%

Consumer Discretionary
0%

5%

10%

15%

15%

20%

25%

30%

Data as of December 31, 2008

© 2009. All rights reserved.

9

Issues with Samplingp g Approachpp
in 2008
 With the significant structural changes following the market-wide shares
unification program and IPOs of many large state-owned companies, somesizeable companies from certain industry groups have not been included fromthe index due to industry group over-representation under the current
sampling approach 50 out of the top 300 securities are not represented under the current
sampling methodology,
methodology accounting for 7.1%
7 1% of the total free float market
capitalization in the China A universe
Top 10 Securities
Name
Industryy Groupp
CHINA PACIFIC INS GRP A
Insurance
CHINA COAL ENERGY A
EnergyDATANG INT'L POWER A
Utilities
BANK OF BEIJING CO LTD A
Banks
ZIJIN MINING GROUP CO-A
CO A
Materials
CHINA SOUTH LOCOMOTIVE -A
Capital Goods
CHINA OILFIELD SVCS A
EnergyAIR CHINA A
Transportation
SHANGHAI ELECTRIC GRP CO L-A Capital Goods
JINDUICHENG MOLYBDENUM A
Materials

Full Market Cap
p12,54911,948
9,752
8,132
7 655
7,655
7,315
6,397
6,079
4,818
3,968

Float Market Cap
p
1,631
1,128
561
1,220
741
1,554
1,032
943
565
794

Full market cap is in USD million. Data as of December 31, 2008

© 2009. All rights reserved.

10

Applying the GIMI Framework to MSCI China A
Index
 The MSCI China A Index under the GIMI framework would produce a largely
similar sector profile with greater coverage while the differences in terms ofsector biases are negligible.
MSCI China A under GIMI framework
MSCI China A under sampling framework
Equity Universe

Sector Weights - 2008
6%
6%
5%

Utilities

2%
2%
1%

T l
Telecom
SServicesi

Equity Universe
MSCI China A (GIMI)
MSCI China A (Sampling)

15%
14%
16%

Materials

2%
3%

Information Tech

4%
18%
18%
19%

Ind strials
Industrials# of Sec
1566
347
313

Coverage
100.0%
80.3%*
71.9%

Data as of December 31, 2008
p excluding
g securities that failed additional investability
y checks*Based on total float mcap

5%
4%
5%

Health Care
Financials

31%
32%

26%
8%
7%
6%
6%
6%
6%

EnergyConsumer Staples

9%9%Consumer Discretionary

0%

5%

10%

11%
15%

20%

25%

30%

35%

Data as of December 31, 2008

© 2009. All rights reserved.

11

A Consistent Global Benchmark Family for
QDII and QFII Investors
 The MSCI Standard Index Series was fully transitioned to the GIMI
methodology in May 2008. The MSCI China A Index is currently the only
stand-alone MSCI index still constructed under the sampling methodology

 With ongoing developments of the QDII & QFII programs, a consistent global
benchmark family constructed under the same methodology would better
facilitate the investment process of domestic investors investing overseas andinternational investors investing in the China A share market− Exhaustive coverage of the investable opportunity set along with non-overlapping

size segmentation− Consistent investability and replicability requirements across investment universe− Improved index coverage of the current MSCI China A Index− Compatible with the MSCI Global Investable Market Indices© 2009. All rights reserved.

12

Methodology
gy Adaptationp
to the A share Index
 The new methodology
gy p
proposesp
to link theminimum size requirement to the global
minimum size reference cut-off for EM inorder to provide better global size
consistency Under the GIMI framework
consistency.
framework,
size integrity is given a higher priority.
However, as the correlation of the A sharemarket with the gglobal market remains low,
applying such a link may potentially
produce greater index instability andpotentially result in coverage reduction

China A & DM

One Year Rolling Correlation

China A & EM

1
0.8
0.6
0.4
0.2

 Our proposal is to ensure an index
coverage between 80% and 90% eventhough some assets may not be in linewithi h theh globall b l minimumi isizei referenceffor EM. Is this desirable? Is a wider
range of index coverage required?

© 2009. All rights reserved.

0
Jan-02Jan-03Jan-04Jan-05Jan-06

Jan-07

Jan-08

-0.2
02

13

Comparing the Current MSCI China A Index to
the Proposed Enhanced MSCI China A Index© 2009. All rights reserved.

14

China A Market Structure Under the GIMI framework,
framework the MSCI China A Index would cover moresizable companies and would capture their specific risks in the index
China A Equity
Universe
1566
173
71
48
11

Current
Methodology
313
125
63
37
11

Enhanced
Methodology
347
157
71
45
11

Full Market Capitalization
Float Market Capitalization
Index Representation (Float Market Capitalization)
Market Size Segment Cutoff (in USD million)

2,157
451
100.0%

1,664
324
71.9%

1,799
354
80.3%*
549

Median Annualized Traded Value Ratio (ATVR)
Average Annualized Traded Value Ratio (ATVR)

738%
904%

361%
399%

364%
408%

Total Number of Companies
Nb of Co between USD 1b and USD 5b Full Mcapp
Nb of Co between USD 1b and USD 5b Float Mcap
Nb of Co above USD 5b Full Mcap
Nb of Co above USD 5b Float Mcap

Note: All market caps are in USD billion. Data as of December 31, 2008
*Based on total float mcap excluding securities that failed additional investability checks© 2009. All rights reserved.

15

Index Turnover Under the GIMI methodology, the number of constituents would be 347 with 62
additionsdditi
andd 28 deletions.
d l ti285 outt off 313 currentt index
i d constituentstit
t would
ld remaini inithe index. The total one-way index turnover would be 11.1%
Current
Industry Group
Nb of Sec Index Wgt
Automobiles & Components
10
1.4%
Banks
10
17.8%
Capital Goods
55
11.9%
Commercial Services & Supplies
1
0.2%
Consumer Durables & Apparel15
2.9%
Consumer Services
3
1.0%
Diversified Financials
2
2.7%
Energy15
6.7%
Food & Staples Retailing3
0.4%
Food, Beverage & Tobacco
15
5.3%
Health Care Equipment & Services
2
0.2%
Household & Personal Products2
0.2%%
Insurance2
3.8%
Materials
71
14.3%
Media
3
0.7%
Pharmaceuticals, Biotechnology & Life
17
4.0%
Real Estate
22
7.4%
Retailing
12
3 4%
3.4%
Semiconductors & Semiconductor Eq1
0.1%
Software & Services
3
0.8%
Technology Hardware & Equipment12
1.9%
Telecommunication Services
1
1.9%
Transportation
21
5.5%
Utilities
15
5 5%
5.5%
Total
313
100.0%Pro Forma
Nb of Sec Index Wgt
10
1.2%
13
17.0%
54
11.5%
1
0.2%
13
2.8%
3
0.9%
5
2.8%
21
7.6%
3
0.4%
17
5.2%
3
0.3%
1
0.1%
%
3
4.0%
74
14.6%
4
0.8%
22
4.5%
27
7.3%
12
3 1%
3.1%
0
0.0%
3
0.7%
10
1.7%
1
1.8%
29
6.1%
18
5 5%
5.5%
347
100.0%

No of Sec
Add
Del

Indx Wgt
Add
Del

1
3
5
2
3
8
3
1
1
1
9
1
5
5
2
8
4
62

0.1%
0.8%
1.1%
0.0%
0.4%
0.0%
0.4%
1.7%
0.0%
0.4%
0.1%
0.1%
0
%
0.5%
2.0%
0.2%
0.9%
0.5%
0 0%
0.0%
0.0%
0.0%
0.2%
0.0%
1.2%
0 6%
0.6%
11.1%

1
6
4
2
1
2
6
1
4
1
28

0.1%
0.0%
0.4%
0.0%
0.3%
0.0%
0.0%
0.1%
0.0%
0.1%
0.0%
0.2%
0
%
0.0%
0.4%
0.0%
0.0%
0.0%
0 0%
0.0%
0.1%
0.0%
0.2%
0.0%
0.0%
0 1%
0.1%
2.0%

Data as of December 31, 2008

© 2009. All rights reserved.

16Additions & Deletions
TOP 10 ADDITIONSNameCHINA PACIFIC INS GRP ABANK OF BEIJING CO LTD A
XINJIANG DUSHANZI TIAN A
CHINA COAL ENERGY A
CHINA OILFIELD SVCS A
AIR CHINA AJINDUICHENG MOLYBDENUM ABANK OF NANJING A
PINGDINGSHAN TIANAN CO A
ZIJIN
IJI MININGI I G GROUPG OU CO-A
CO A

Industryy Groupp
Insurance
Banks
Materials
EnergyEnergyTransportation
Materials
Banks
EnergyMaterials
i l

DIF Market Cap
p
1,631
1,220
1,205
1,128
1 032
1,032
943
794
791
786
741
41

Industry GroupHousehold & Personal Products
Automobiles & Components
Materials
Capital Goods
Consumer Durables & ApparelppTechnology Hardware & Equipment
Materials
Semiconductors & Semiconductor Equipment
Capital Goods
Household & Personal Products

DIF Market Cap
326
291
287
266
262
261
256
253
248
248

Data as of December 31, 2008

TOP 10 DELETIONSName
FEILO ACOUSTICS ASUNDIRO HOLDING CO A
HUBEI SHUANGHUAN SCI AJONJEE HIGH & NEW TECH A
JIANGSU SIHUAN BIOENGR ASHANGHAI FEILO A
FUJIAN QINGSHAN PAPER AJIANGSU CHANGJIANG ELE A
SHANGHAI JINLING CO A
LIUZHOU LIANGMIANZHEN A
Data as of December 31, 2008

© 2009. All rights reserved.

17

Discussion Points
 Transition to the GIMI framework- Is it appropriate to transition the current MSCI China A Indices under the
GIMI framework?

 The MSCI China A Small Cap Index under the GIMI framework would haveapproximately 600 index constituents- Is there demand for benchmark covering the small cap companies in the
China A shares market?

© 2009. All rights reserved.

18

Appendix© 2009. All rights reserved.

19

Methodology Proposal:
Deriving the Investable Universe
Investability
y screens are used to arrive at an investable universe and theInvestable Market Index to ensure replicability of constituents.

 Equity Universe Minimum Size Requirement:
99% of free float DM equity universe
 Minimum Free Float:% of Equity
q y Universe Minimum Size
50%
Requirement
 Liquidity Screen:
Annualized Traded Value Ratio (ATVR) of
15%

Investable Market
Index
Total Listed
Equity Universe

Investable
Equity Universe

 Global Minimum FIF Requirement:
0.15 in general Minimum Tradingg length:gThree months in general© 2009. All rights reserved.

Companies notmeeting additional
requirementsit

20

Methodology Proposal:
Constructing Appropriate Size Segments
Deriving
g the Size and Coverageg Targetg Area

The distribution of company market capitalizations varies from market to market.
Therefore, the use of the same company size cut-offs and the same market
coverage targets to create size segments is not feasibleStriking balance between size integrity and market coverage requires the use of-

Global minimum company size ranges, and-Market coverage target ranges

The intersection of the minimum size range with the coverage range describes aSize and Coverage Target Area which will be used to find a balance between size
integrity and market coverage© 2009. All rights reserved.

21

Methodology Proposal:
Constructing Appropriate Size Segments (cont’d)Definingg Coverageg and Size Rangesg

The market coverage range proposed for various segments is defined ascoverage of:- 65% to 75% in each market for the Large Cap Index- 80% to 90% in each market for the Standard Index and- 98.5% to 100% in each market for the Investable Market Index

The global minimum company size range for each segment is defined by:- First determining a global minimum size reference and- Then specifying a range around the global minimum size reference© 2009. All rights reserved.

22

Methodology Proposal:
Global Minimum Size ReferenceThe global minimum size references for the size
segment indices are derived by:-First, aggregating the individual Developed
Market countries investable universes tocreate a global investable universe-

Then Choosing the full market
capitalization at:
-

-

-



The 70th percentile as the cut-off
between the Large Cap and Mid Cap
Index
The 85th percentile as the cut-off for theStandard Index,, i.e. between the Mid
Cap and Small Cap Index
The 99th percentile as the cut-off at thebottom for the Investable Market Index

For Emerging Markets, the global minimum sizereference is set at ½ the level of the Developed
Markets. This minimum size reference will beappliedpp
to China A© 2009. All rights reserved.

10,669

5,334

3,359

1,680

284

142

All the market caps are in USD millions. Data as of July 23, 2008

23

MSCI Barra 24 Hour Global Client Service

Americas

Europe, Middle East & Africa

Asia Pacific

Americas1.888.588.4567 (toll free)

Amsterdam+31.20.462.1382

China North

10800.852.1032 (toll free)Atlanta+1.404.551.3212

Cape Town+27.21.683.3245

China South

10800.152.1032 (toll free)

Boston+1.617.532.0920

Frankfurt+49.69.133.859.00

Hong Kong+852.2844.9333

Chicago+1.312.706.4999

Geneva+41.22.817.9000

Singapore+65.6834.6777

M t lMontreal+1 514 847 7506
+1.514.847.7506

L d
London+44 20 7618 2222
+44.20.7618.2222

Sydney+61 2 9033 9333
+61.2.9033.9333

New York+1.212.804.3901

Madrid+34.91.700.7275

Tokyo+81.3.5226.8222

San Francisco+1.415.576.2323

Milan+39.02.5849.0415

São Paulo+55.11.3706.1340

Paris0800.91.59.17 ((toll free))Toronto+1.416.628.1007

Zurich

+41.44.220.9300

clientservice@mscibarra.com© 2009. All rights reserved.

24

Notice and Disclaimer
This document and all of the information contained in it, including without limitation all text, data, graphs, charts (collectively, the “Information”) is theproperty off MSCISC Inc., Barra, Inc. (“Barra”),(“”) or their affiliatesff(including(
without limitation Financial Engineering Associates, Inc.)) (alone(
or with one ormore of them, “MSCI Barra”), or their direct or indirect suppliers or any third party involved in the making or compiling of the Information (collectively,
the “MSCI Barra Parties”), as applicable, and is provided for informational purposes only. The Information may not be reproduced or redisseminated inwhole or in part without prior written permission from MSCI or Barra, as applicable.



The Information may not be used to verify or correct other data, to create indices, risk models or analytics, or in connection with issuing, offering,sponsoring, managing or marketing any securities, portfolios, financial products or other investment vehicles based on, linked to, tracking or otherwise
derived from any MSCI or Barra product or data.



Historical data and analysis should not be taken as an indication or guarantee of any future performance, analysis, forecast or prediction.

None of the Information constitutes an offer to sell (or a solicitation of an offer to buy), or a promotion or recommendation of, any security,
financial product or other investment vehicle or any trading strategy, and none of the MSCI Barra Parties endorses, approves or otherwise
expresses any opinion regarding any issuer, securities, financial products or instruments or trading strategies. None of the Information,
MSCI Barra indices, models or other products or services is intended to constitute investment advice or a recommendation to make (orrefrain from making) any kind of investment decision and may not be relied on as such.

The user of the Information assumes the entire risk of any
y use it mayy make or permitpto be made of the Information.



NONE OF THE MSCI BARRA PARTIES MAKES ANY EXPRESS OR IMPLIED WARRANTIES OR REPRESENTATIONS WITH RESPECT TO THE
INFORMATION (OR THE RESULTS TO BE OBTAINED BY THE USE THEREOF), AND TO THE MAXIMUM EXTENT PERMITTED BY LAW, MSCIAND BARRA, EACH ON THEIR BEHALF AND ON THE BEHALF OF EACH MSCI BARRA PARTY, HEREBY EXPRESSLY DISCLAIMS ALL IMPLIEDWARRANTIES (INCLUDING, WITHOUT LIMITATION, ANY IMPLIED WARRANTIES OF ORIGINALITY, ACCURACY, TIMELINESS, NONINFRINGEMENT, COMPLETENESS, MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE) WITH RESPECT TO ANY OF THE
INFORMATION.



Without limiting any of the foregoing and to the maximum extent permitted by law, in no event shall any of the MSCI Barra Parties have any
liability regarding any of the Information for any direct, indirect, special, punitive, consequential (including lost profits) or any other damages
even if notified of the possibility of such damages. The foregoing shall not exclude or limit any liability that may not by applicable law be
excluded or limited, including without limitation (as applicable), any liability for death or personal injury to the extent that such injury resultsfrom the negligence or wilful default of itself, its servants, agents or sub-contractors.



Any use of or access to products, services or information of MSCI or Barra or their subsidiaries requires a license from MSCI or Barra, or theirsubsidiaries, as applicable. MSCI, Barra, MSCI Barra, EAFE, Aegis, Cosmos, BarraOne, and all other MSCI and Barra product names are thetrademarks, registered trademarks, or service marks of MSCI, Barra or their affiliates, in the United States and other jurisdictions. The Global Industry
Classification Standard (GICS) was developed by and is the exclusive property of MSCI and Standard & Poor’s
Poor s. “Global
Global Industry Classification
Standard (GICS)” is a service mark of MSCI and Standard & Poor’s.

© 2009 MSCI Barra. All rights reserved.

© 2009. All rights reserved.

25