US ratings agency takes a first step in affirming its commitment to the fast-growing Chinese market A new financial index based on mainland-listed companies is a first step by ratings agency Standard & Poor's (S&P) in an expansion of its business in China. S&P said yesterday it had signed an agreement with Citic Securities to develop two indices, one for 50 stocks and a second for 300, for use by the growing number of domestic securities firms, global funds and money managers investing in China under the QFII programme. 'S&P over the next few years is looking at making a major commitment to China,' S&P Asia Pacific managing director William Reidy said. The agency's main areas of interest include equity research on Chinese companies related to its indices and the provision of ratings on funds in China, similar to a service provided by Morningstar in the United States. Stock indices are a basket of stocks whose price is used by fund managers as a benchmark for the value of their investments. They are a benchmark for investors and also a foundation from which to create other financial instruments such as derivatives. The two indices will put S&P in competition against the global heavyweight of indices, Morgan Stanley's MSCI, and a newcomer to China, a joint venture between the Financial Times and Xinhua Financial Network. Citic said it would eventually abandon its index because it did not meet international standards. 'Without an upgrade, our clients would look for other indices like MSCI and FTSE-Xinhua,' said Gang Xu, director of financial product development at Citic Securities. Robert Shokotko, S&P's managing director of index services in New York, said the S&P Citic indices would differ from other versions by offering its own global classification system for stocks. Fund managers using the S&P indices or the MSCI - both based on the S&P classification system - will be able to benchmark against the new indices. In addition, S&P said the smaller, 50-stock index could be used as a trading vehicle, while the bigger 300-stock index would include more of the overall market. The FTSE-Xinhua 200 stock index did not allow both uses, Mr Shokotko said. 'The compromise between the traded and the benchmark index doesn't work very well,' he said. Neither Xinhua-FTSE nor MSCI would comment about S&P's China products. S&P is forming an advisory board that will meet early in the first quarter to decide on what stocks to include in its indices, which will be based on A-share companies. Some equity strategists in Hong Kong say China's stock markets lack large, liquid companies required for indices, while most foreign funds tend to buy Chinese companies through their H-share listings in Hong Kong, making an index in China less important. Mr Shokotko acknowledged it would take time to build the index in China, saying S&P spent five years developing an index in India, futures of which now trade 100,000 contracts a day.