Market consultation

FTSE China A Index Offering

ftserussell.com

September 2021
2021

FTSE China A Index Offering
Introduction
The opening of China’s onshore equity market has afforded foreign investors greater degrees of access towhat is now the world’s second largest equity market.
The number of investable onshore Chinese equities has increased from 1,060 at the end of 2001 to 4,140 at
the end of 20201. By the same token, the first phase of FTSE Russell’s China A Share implementation inJune 2020 saw more than 1,000 China A shares added to the FTSE Global Equity Index Series (GEIS) 2.
As the China A share market has grown, there has been an increase in calls from index users and investors
for a larger variety of tools to assist with the management of their portfolios. To this end, indices with greater
diversification have become a priority for many market participants.

FTSE China A Index Offering Market Consultation
Against the backdrop of the developments and market dynamics outlined above, FTSE Russell remains
committed to offering the most representative indices for the Chinese stock market and ensuring that index
users, trackers and investors can benefit from tools that provide the broadest possible market
representation. On this basis, FTSE Russell is inviting index users and other stakeholders to participate in a
consultation on the FTSE China A index offering.
The purpose of the consultation is to ensure that the FTSE China A Indices continue to meet therequirements of index users. As a result, FTSE Russell is soliciting market feedback on a number of aspects
in relation to:
i)
ii)
iii)

index market representation;
the index weighting methodology; andindex constituent accessibility.

This feedback will be sought in accordance with the FTSE Russell Policy for Benchmark Methodology
Changes. The consultation will close on 11 October 2021.

1
2

Source: FTSE Russell.
Source: FTSE Russell press release: FTSE Russell completes landmark inclusion of China A Shares, published 22 June 2020

FTSE Russell

2Responding to the consultation
The proposals set out in this consultation document are included in order to gather feedback andmay or may not result in changes to our indices or data solutions.
Index users and other stakeholders are invited to respond by 11 October 2021. The responses will be
reviewed by the FTSE Russell Product Governance Board and an update on FTSE Russell’s
proposed approach will be communicated in due course.
Please submit your response to the questions included in this consultation online athttps://www.surveymonkey.co.uk/r/FTSEChinaAIndexOffering
All responses will be treated as confidential. FTSE Russell may publish a summary of theconsultation results, but no individual responses will be published and no respondents will be named.
If you have any questions about this survey, or if you encounter any technical issues, please contact
committeesecretary@ftserussell.com .

FTSE Russell

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FTSE China A Index Offering Consultation
Market Representation
China’s A share market has expanded in recent decades. The number of investable equities in the China A
share market as of August 2021 amounted to 4,4513. Almost 2,000 of these investable equities are membersof the FTSE China A All Cap Free Index, which comprises all Large, Mid and Small Cap A share constituentsthat meet the index eligibility requirements.
The table below displays a selection of FTSE China A Indices, including the number of constituents and thepercentage that those constituents represent in the China A Universe and the FTSE China A All Cap Free
Index respectively. From this data it can be inferred that the China A share market has considerable depth
beyond the small cohort of very large companies that typically characterise Emerging Markets. Given thesemarket characteristics, FTSE Russell is looking to establish whether the index selection below provides
appropriate Large and Mid market capitalisation delineation and representation for a tradeable index, or
whether index users would prefer, or consider, alternative index solutions.
A selection of the FTSE China A Indices% FTSE China
A All CapFree Index

Number ofcompanies% China A
Universe

China A Universe

4,451

100.00%FTSE China A All Cap Free Index

1,993

81.66%

100.00%FTSE China A50 Index

50

25.01%

30.63%FTSE China A 200 Index

200

45.73%

56.00%FTSE China A 600 Index

600

65.04%

79.65%FTSE China A Stock Connect CNH Large Cap Index294

47.72%

58.44%FTSE China A Stock Connect CNH Mid Cap Index

417

11.59%

14.19%FTSE China A Stock Connect CNH Index

711

59.31%

72.63%

Indices with fixed number of constituents

Indices with variable number of constituents

Source: FTSE Russell. Data as of 23 August 2021. For further details of the FTSE China A index offering, please refer to Appendix A.

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Source: FTSE Russell data.

FTSE Russell

4Market Capitalisation Weighted Approach
FTSE Russell imposes neither individual constituent nor sectorial capping within the FTSE China A Indices,
the aim of which is to ensure the indices are representative of the China A share market.
The China A share market is diverse and has greater intra-market differentiation than most other global
markets. This can be seen in Exhibit one: despite the Financials ICB industry group comprising only 91 of
the almost 2,000 constituents, the Financial Industry represents more than 16% of the FTSE China A All Cap
Free Index. On account of state owned banks and insurance companies being the largest listed companies
by full market capitalisation, the Financial Industry comprises more than one third of the FTSE China A50
Index (see Exhibit two).
A sector capping, factor-based or an equal weighted index construction approach could lead to higher index
turnover. Some stocks may be significantly under/overweight, potentially leading to industry groups being
misrepresented. Consequentially, and in time, this may cause a performance deviation from the broader
China A share market. On this basis, it is FTSE Russell’s view that a market capitalisation weighted
approach continues to offer an appropriate balance between degrees of representation, turnover andtradability for the China A share market, and the construction methodology remains well-understood andtransparent.
Exhibit one – FTSE China A All Cap Free Index: number of constituents in each ICB Industry andtheir respective weighting % by full market capitalisation%
Number of

WeightingConstituentsby full Mkt

ICB Industry
Cap
Basic Materials

274

11.51%

Consumer Discretionary

325

13.00%

Consumer Staples

118

10.86%

Energy58

4.34%

Financials

91

16.31%

Health Care

192

8.79%

Industrials

431

15.24%

Real Estate

89

2.18%

Technology

268

12.17%

Telecommunications

75

2.87%

Utilities

72

2.72%

Grand Total

1993

100.00%FTSE China A All Cap Free
Telecommunicatio
Utilities
ns
2.72%
2.87%
Technology
12.17%

Basic Materials
11.51%

Consumer
Discretionary
13.00%

Real Estate
2.18%

Industrials
15.24%

Health Care
8.79%

Consumer Staples
10.86%

Energy4.34%
Financials
16.31%

Source: FTSE Russell data as of
23 August 2021

FTSE Russell

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Exhibit two – FTSE China A50 Index: number of constituents in each ICB Industry and theirrespective weighting % by full market capitalisation%
Number of

WeightingConstituentsby full Mkt

ICB Industry
Cap
Basic Materials

2

2.49%

Consumer Discretionary

6

14.84%

Consumer Staples

922.68%

Energy3

6.49%

Financials

16

34.76%

Health Care

5

FTSE China A50
Consumer
Discretionary
14.84%

7.00%

Industrials

4

4.15%

Basic Materials
2.49%

Real Estate

1

1.04%

Utilities
2.12%

Technology

1

2.04%

Telecommunicatio
ns
2.39%

Telecommunications

2

2.39%

Utilities

1

2.12%

Grand Total

50

100.00%Technology
2.04%
Real Estate
1.04%

Industrials
4.15%

Health Care
7.00%

Consumer Staples
22.68%
Energy6.49%

Financials
34.76%

Source: FTSE Russell data as of 23 August 2021

FTSE Russell

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Accessibility: Foreign Ownership Levels
International investors are able to invest in China A Shares via the Qualified Foreign Institutional Investor(QFII)/Renminbi Qualified Foreign Institutional Investor (RQFII) and the Northbound Stock Connect (Stock
Connect) routes.
The Foreign Ownership Level (FOL) is restricted to 30% for QFII/RQFII and 28% for Stock Connect. Within
the FTSE China A Index offering:•indices such as the FTSE China A 200 Index, which seek to reflect the perspective of domestic
investors, do not reflect FOLs;•

indices that seek to reflect the perspective of international investors, such as FTSE China A Stock
Connect CNH Index via Stock Connect route, are therefore adjusted to a 28% FOL; and•indices such as the FTSE China A50 Index, that seek to reflect the perspective of both domestic andinternational investors, are not FOL adjusted. Any foreign headroom adjustment is only actioned
when a constituent breaches the FOL threshold (please see appendix B for a full explanation).

FTSE Russell seeks to refine the available FTSE China A index propositions in relation to the foreign
ownership methodology, in order to more accurately reflect the different needs of domestic and international
index users.

Accessibility: QFII/RQFII and Stock Connect Routes
The Stock Connect route is perceived by many international investors to be a more convenient method ofaccessing the China A share market. The FTSE Global Equity Index Series (GEIS) bases the inclusion ofChina A Shares on the attributes of the Stock Connect route, as this meets the requirements of an Emerging
Market when assessed against the applicable FTSE Equity Country Classification criteria.
For a broadly used and highly liquid, tradable index such as the FTSE China A50 Index, FTSE Russell feelsthat it is appropriate to capture the set of investable securities that is offered through both the QFII/RQFIIand Stock Connect routes. As such, FTSE Russell would like to understand whether the FTSE China A
indices, with their fixed number of constituents (see table on page four):i)should only derive index constituents from the universe of stocks available through the Stock
Connect route; orii)should also include the stocks which are accessible via the QFII/RQFII route, in addition to the Stock
Connect route.

FTSE Russell

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Consultation Questions
1. FTSE Russell seeks to understand whether index users:☐ A: believe that any of the current FTSE China A Indices, with a fixed number of constituents (seepage four), provide appropriate market representation for use as a tradable index; or,☐ B: would prefer or consider an alternative tradable index with a different number of constituents – forexample, the top 100 companies by full market capitalisation, which would represent approximately
40% of the FTSE China A All Cap Free Index;

Number ofcompanies% China A
Universe% FTSE China A
All Cap Free
Index

100

33.38%

40.88%

Please enter your comments here:

2. FTSE Russell seeks to understand whether index users:☐ A: support the retention of the market capitalisation weighted approach across all of the indiceslisted on page four, particularly for those with a fixed number of constituents;☐ B: support individual stock capping;☐ C: support sectorial capping; or☐ D: would prefer or consider an alternative index weighting solution.

FTSE Russell

8Please enter your comments here:

3. FTSE Russell seeks to understand whether the policy for foreign ownership management should bealigned across the FTSE China A index offering. Index users are asked to indicate whether they:☐ A: do not support the alignment of the FOL management policy and instead would prefer to keep tothe status quo (as outlined on page seven);☐ B: support the alignment of the FOL management policy across all FTSE China A indices; or☐ C: would prefer or consider an alternative proposal.

Please enter your comments here:

4. For the FTSE China A indices, which have a fixed number of constituents (see page four), FTSE Russell
seeks to understand whether index users support:☐ A: the derivation of the eligible stocks from both the QFII/RQFII and Stock Connect routes;☐ B: the derivation of the eligible stocks from the Stock Connect route only; or☐ C: an alternative proposal.

Please enter your comments here:

FTSE Russell

9Appendix A
FTSE Russell China Index Offering

FTSE Russell

10Appendix B
FTSE China A50 Index Ground Rule – 4.4.3 Minimum Foreign Headroom Requirement
FTSE Russell defines “foreign headroom” as the percentage of shares available to foreign investors as aproportion of the company’s Foreign Ownership Limit (FOL), i.e. (FOL – foreign holdings)/FOL. For example,
if a company has a foreign ownership limit, of 49%, of which 39% is held by foreign investors, the foreign
headroom will be calculated as 20.41% i.e. (49% - 39%)/ 49%.
A) For a non-constituent that is subject to foreign ownership limit, a minimum headroom of 20%
must be available in order to be included in the index.
B) For an existing constituent that is subject to foreign ownership limit, a minimum headroom of 10%
must be available.
C) Headroom tests are conducted in conjunction with the March, June, September and December
quarterly reviews.
D) Where the headroom of an existing constituent falls below 10% and its free float is greater thanits foreign ownership limit5 , its investability weight will be lowered to its foreign ownershipweight in four steps, i.e. the next four consecutive quarterly reviews, in equal proportion. The
reduction will not be reversed in the case that the foreign headroom rises above 10%.
For example, if Company A’s free float is 60% (i.e. Free Float is greater than the 28% FOL), its
investability weight will be reduced in the following steps:
Company A’s free float subsequently decreases from 60% to 40%(Q1) First Headroom Adjustment

52% (8% reduction from 60%, where 8% = (6028%)/4)(Q2) Second Headroom
Adjustment

40% (reflects reduced free float from 60% to 40%)

(Q3) Third Headroom Adjustment

34% (6% reduction from 40%, where 6% = (40%28%)/2)(Q4) Fourth Headroom
Adjustment

28% (6% reduction)E) Where the headroom of an existing constituent falls below 10%, and its free float is less thanits foreign ownership limit or following the weight adjustments in 4.4.3 D) its headroom
remains below 10%, its investability weight will be reduced at the next quarterly review. The
first headroom adjustment will be an absolute value of 10%, any subsequent headroom
adjustments will be an absolute value of 5%.
F) For example, if Company B’s current investability weight is 20% (i.e. free float is more
restrictive than FOL), a 10% absolute reduction will result in an adjusted investability weightof 10% (20%-10%).
G) Please note, prior to March 2016, existing index constituents which had a headroom lessthan 10%, had their investability weight reduced by 10% of their current investability weighti.e. if their investability weight was 49%, a 10% relative adjustment will result in an adjusted
investability weight of 44.1% (49% * 0.9).
H) Where the aggregate foreign shareholding of an existing constituent has reached the foreign
ownership limit of 28% intra-review, its investability weight will be reduced by an absolutevalue of 10% (if it is the first headroom adjustment) or 5% (if it is a subsequent headroom
adjustment) with the provision of a T+2 advanced notification from the date of discovery.
I)

FTSE Russell

Where discovery occurs on the Thursday or Friday prior to a quarterly review effective date,then the FOL decrease will be applied after the index review effective date with a provisionof a T+2 advanced notification.

11J) Following the first headroom adjustment of 10% as described in E) and F), the investability
weight will continue to be reduced at subsequent quarterly reviews in increments of 5% until
the headroom level increases to 10% or above. As a result of these quarterly 5% downward
adjustments, should the investability weight of the security fall to 5% or below under thisprocess, the security will no longer be eligible to remain in the index subject to the rules
outlined 4.4.2.
K) The investability weight of an existing constituent which has been subject to headroom
adjustments will have its most recent 5% adjustment reversed at a quarterly review subject
to the condition that either the company’s foreign ownership is no longer flagged by thestock exchanges and when the headroom remaining minimum 20% post reversal. The
adjustment will continue until its investability weight reaches the free float (where free float isless than FOL as illustrated in example 1 below) or reaches the FOL (where the FOL is lessthan the free float as illustrated in example 2 below).
L) Example 1, Company A has an FOL of 28%, foreign holdings of 17%, and it has a free floatof 25% with a current headroom adjustment investability weight of 10%.
M) Step 1: The foreign headroom test is calculated as 39.3% (i.e. (28%-17%)/28%), highlighting
a potential reversal.
N) Step 2: The post reversal foreign headroom test is calculated as 21.4% (i.e. (28%(17%+5%))/28%), the headroom adjusted investability weight will be increased from 10% to
15% (i.e. 10% +5%).
O) Step 3: Step 1 & 2 will be repeated until the headroom adjusted investability weight reaches
25% (i.e. free float).
P) Example 2, Company B has an FOL of 28%, foreign holding of 17% and it has a free float of
75% with a current headroom adjusted investability weight of 10%.
Q) Step 1: The foreign headroom test is calculated as 39.3% (i.e. (28%-17%)/28%), highlighting
a potential reversal.
R) Step 2: The post reversal foreign headroom test is calculated as 21.4% (i.e. (28%(17%+5%))/28%), the headroom adjusted investability weight will be increased from 10% to
15% (i.e. 10% +5%).
S) Step 3: Step 1 & 2 will be repeated until the headroom adjusted investability weight reaches
28% (i.e. FOL).

FTSE Russell

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13About FTSE Russell
FTSE Russell is a leading global index provider creating and managing awide range of indices, data and analytic solutions to meet client needs
across asset classes, style and strategies. Covering 98% of the investable
market, FTSE Russell indices offer a true picture of global markets,
combined with the specialist knowledge gained from developing local
benchmarks around the world.
FTSE Russell index expertise and products are used extensively byinstitutional and retail investors globally. For over 30 years, leading asset
owners, asset managers, ETF providers and investment banks have chosen
FTSE Russell indices to benchmark their investment performance andcreate investment funds, ETFs, structured products and index-based
derivatives. FTSE Russell indices also provide clients with tools for asset
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A core set of universal principles guides FTSE Russell index design andmanagement: a transparent rules-based methodology is informed byindependent committees of leading market participants. FTSE Russell isfocused on index innovation and customer partnership applying the highest
industry standards and embracing the IOSCO Principles. FTSE Russell iswholly owned by London Stock Exchange Group.
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