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The Chinese index puzzle

Investing in China is tricky enough without having to offer coherent data on performance. Fund managers, under increasing pressure to outperform benchmarks, are struggling with the fact that index providers offer a mystifying range of products covering Chinese stocks.

China indices

Source: Bloomberg

FABRICE JACOB, MANAGING director of Hong Kong asset manager MYM Capital, scratches his head as he spreads sheets of paper across his desk, each with a table purporting to represent a China equity index. MYM is launching a new China fund and he has to choose a benchmark index.

"As a fund manager," Jacob says, "your goal is to outperform your benchmark index. If you outperform by 1%, you might get a bonus; by 2%, you're a genius, that's the way it works. So the benchmark is crucial. Once you've selected it, you're stuck with it - you're married to it."

It sounds simple enough, but look more closely at the constituents of each index covering China and the problems become apparent. Even defining what constitutes a Chinese company is no easy task.

HSI Services, the market leader in the Hong Kong market, produces the Hang Seng Index (HSI), the benchmark for the Hong Kong Stock Exchange. The HSI already includes Hong Kong-listed mainland-China securities, dubbed H shares if they are privatized enterprises or red chips if they are foreign-incorporated companies controlling mainland-China assets.

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