Global index vendor FTSE has launched a consultation process with officials from institutional investors, fund management companies, stock markets and regulators to determine how to classify countries' economic status in indices, in a move that is likely to impact north Asian markets.
One driver behind the review is China's relatively new qualified foreign institutional investor scheme, which allows foreign portfolio money into the A-share market for the first time.
Paul Hoff, managing director at FTSE in Tokyo, says, "China is rapidly moving to have foreign investors involved in its market. The capital flows can be tremendous. We estimate there is $200-300 billion invested in global emerging markets via institutional investors following benchmarks. If China is put into our global index, investors may have to sell Taiwan and Korea in order to get into the A-share market. It would have a big impact."
FTSE is reviewing the status of Taiwan and Korea, asking market participants if they should remain as 'advanced emerging' markets - a halfway house between 'emerging markets' and 'developed markets' - or be upgraded. Taiwan's removing its QFII scheme has also prompted a new look at the region. Globally, FTSE is also considering how to treat Eastern European nations entering the European Union.
Rival MSCI has been weighing a switch for Korea from emerging to developed for some time; it does not have an 'advanced emerging' category.
"We have been watching as MSCI studies Korea and Taiwan," Hoff says. He says FTSE's evaluation will go hand-in-hand with market opinion. "Do we count these countries as developed? What does that mean - do we just look at per capita GDP or other factors such as liquidity? Should there be an 'advanced emerging' category?"
The vendor hopes to complete its market consultation and compile data by the end of the year, with the aim of providing policy recommendations to a working group in the spring that will hammer out a new framework. Implementation would commence in 2005.
FTSE says the review is designed to provide investors with a transparent and objective way to classify markets, combining macroeconomic factors with local market conditions. No single, widely used and transparent way of defining markets exists today.
