FTSE Russell is considering a significant adjustment to its China index

FTSE Russell CHIEF Executive Starr said it would adjust the FTSE China A50 index, potentially doubling the number of index constituents. The move is in response to competition from the Hong Kong Stock Exchange.

FTSE Russell is considering making major adjustments to an index that is relied on by a widely used Chinese futures contract in Singapore, including the possibility of doubling the number of constituents of the index. Previously, the Hong Kong Stock Exchange (HKEx) broke the monopoly of its competitors on this very popular deal.

ARNE Staal, FTSE Russell's chief executive, said the company could adjust its FTSE China A50 index based on investor feedback. The index is a key tool for international traders seeking to hedge exposure to Chinese equities.

According to FTSE Russell and the Singapore Exchange (SGX), the volume of SGX's A50 index futures has risen 20% year-on-year to 9.3 million contracts.

China's economy has recently been disrupted by coal shortages and a liquidity crisis among real estate developers, which has exacerbated volatility in China's stock market and highlighted growing demand for hedging tools from global investors. So far this year, global investors have poured tens of billions of dollars into China's stock market.

The FTSE China A50 index covers the 50 largest companies listed in Shanghai and Shenzhen, including Kweichow Moutai, the world's most valuable wine group, and Ping An Insurance, China's largest private insurance company.

Starr said the process of soliciting opinions from investors has recently ended and changes being considered include an index expansion that could expand to include 100 companies.

Investors were also asked if they were satisfied with the index's market capitalization-based stock weighting calculation method and what channels they would prefer to use to invest in companies listed in Shanghai and Shenzhen.

"The market is changing, the economy is changing, and the index also needs to be updated to reflect the transparency of the investment opportunities that investors are currently looking for," Starr said. He also said he wanted the index to remain as "important" as possible.

The index is the basis for SGX's wildly popular futures contracts, and these potential changes follow the fact that HKEX broke its monopoly on SGX last month by launching its own products targeting Chinese mainland stocks.

Last May, the HONG KONG STOCK EXCHANGE also took away from the SGX a major derivatives licensing agreement that allowed the SGX to offer futures and options contracts based on 37 indexes of index provider MSCI, mostly located in Asia. SGX has held the agreement for more than 20 years.

Stahl said the composition of the MSCI China A50 Connect index on which futures contracts traded on the Hong Kong Stock Exchange are based provides "very different exposure from ours."

SGX CHIEF Executive Boon-Chye Loh added that FTSE China A50 futures are an "ultra-liquid" contract that will remain critical for international investors as the Chinese market continues to open up.

They said SGX and FTSE Russell had ensured that more than 90% of SGX's index futures trading volume was not transferred to HKEx with MSCI's new products.

Even so, SGX's derivatives business has taken a hit over the past year. In the 12 months to the end of June, derivatives revenue from its equity business fell 20% to S$288.4 million (US$213 million).

Since the release of results and disclosure of net profit in August fell by 7% to S$447 million, SGX shares have plunged nearly 20%. Its share price has risen about 7% so far this year, compared with a 12% increase in the same period of the Hong Kong Stock Exchange.

Michael Wu, a senior equity analyst at Morningstar, said the adjustment to the FTSE index "will help better align with and fully reflect the Chinese economy."

He added, "There are fears that the SGX will be replaced by the HKEx... But it does have an ecosystem effect" — he was referring to the high liquidity of China's A50 futures market and strong demand from existing investors. "Overall, SGX has been very innovative when it comes to derivatives."

Others are less optimistic about the SGX's prospects. Citi analysts said they expected the new futures to have a limited boost to HKEx profits in the short term, as it would take some time for trading to catch up with the SGX contract. But they added that "in the long run, the Hong Kong Stock Exchange appears to be in a better position than the SGX in terms of derivatives"