Shanghai Composite Index Essay

The Shanghai Composite Index is an authoritative set of statistical indicators adopted by domestic and overseas investors in measuring the performance of the Chinese security market. The Shanghai Stock Exchange (SSE) Indices are price indices including the SSE 180 Index, SSE 50 Index, SSE Dividend Index, SSE New Composite Index, SSE Composite Index, Sector Index, SSE Fund Index, SSE Government Bond Index, and SSE Corporate Bond Index. The SSE Composite Index is the earliest one compiled.

The Shanghai Composite Index includes all listed stocks at the SSE. It includes A shares and B shares. The base day for the SSE Composite Index was December 19, 1990. The base period is the total market capitalization of all stocks on that day. The base value is 100. The index was launched on July 15, 1991. Companies are weighed according to their size in terms of market capitalization (calculated as the total number of outstanding shares multiplied by the market price per share). Market capitalization represents the total market value of all companies listed on the exchange.

The SSE New Composite Index comprises listed stocks that have completed split-share reform. The base day for the index was December 30, 2005. The index was launched on January 4, 2006.

The SSE 180 has made major improvements in methodology by taking China’s current financial market situation into consideration and integrating international experience. Thus, the index represents the Shanghai market situation and forms a performance benchmark index. The SSE 50 is an index of good-quality and large-scale stocks. The SSE Government Bond Index and the Corporate Bond Index were launched in 2003. Thus, SSE Indices reflect overall price changes of stocks listed at the SSE from different perspectives. They provide investors with benchmark systems for different investment portfolios.

There are two major stock exchanges in mainland China: the SSE and the Shenzhen Stock Exchange. Both offer A shares and B shares of common stock issued by Chinese companies. B share listings all carry the same rights as A share listings and receive the same dividends. A shares are restricted to China’s citizens residing on the mainland and are denominated in renminbi (RMB). B shares were initially restricted to non-Chinese nationals. In February 2001, the Chinese government allowed Chinese residents to purchase B shares. B shares are not convertible to A shares and are traded in U.S. dollars in the Shanghai stock market. The Chinese authorities allow dividends and capital gains from B shares to be sent abroad. Foreign securities houses can serve as dealers of B shares and if they are designated as qualified foreign institutional investors (QFIIs), they are allowed to trade and invest in A shares. QFIIs are foreign financial institutions that meet certain requirements and are permitted to invest in local currency and use the specific accounts investing in the local securities markets.

With the exception of the stock exchange in Hong Kong, the SSE is the largest stock exchange in China. It is based in the city of Shanghai, with a market capitalization of almost US$3 trillion in 2007. The number of listed companies is around 900 and the SSE is fifth largest in the world. Daily average turnover in2006 was US$54 billion. Total turnover for stock was around US$8 trillion in 2006. In conclusion, the SSE Indices have become an indicator of China’s economy. The current exchange is directly managed by the China Securities Regulatory Commission. Trading hours are 9:30 a.m.–11:30 a.m and 1 p.m.–3 p.m., Monday through Friday.

The Shanghai Securities Exchange began to operate in December 1990. From a base of 100, the Shanghai Composite Index reached 1,500 in February 1993, but fell to 340 in July 1994, possibly as a result of the implementation of company law in July 1994, whereby listed companies must provide financial and nonfinancial information to the public and false disclosure constitutes a criminal offense. The Composite Index reached 1,258 on December 12, 1996, and the daily transaction value increased to US$2 billion on the Shanghai market, which was larger than the Hong Kong market at that time. The index rose again in February 1997 and reached a record high in April 1997. It seems that the Chinese stock market was not influenced by the financial crisis in East Asia that began in summer 1997. Government intervention in the stock market halted the rise in mid-1998. In mid-1999, state-owned enterprises were allowed to buy their own shares on the market, thus there was a sharp rise in the index for two months. In early summer 2001, the government started checking the source of the funds invested by firms on the stock market and the price collapsed.

Bibliography:

  1. Joshua Seungwook Bahng and Seung-myo Shin, “Do Stock Price Indices Respond Asymmetrically?:Evidence from China, Japan, and South Korea,” Journal of Asian Economics (v.14/4, 2003);
  2. Thomas C. Chiang, Edward Nelling, and Lin Tan, “The Speed of Adjustment to Information: Evidence From the Chinese Stock Market,” International Review of Economics & Finance (v.17/2, 2008);
  3. Eric Girardin and Zhenya Liu, “The Chinese Stock Market: A Casino With ‘Buffer Zones?’” Journal of Chinese Economic and Business Studies (v.1/1, 2003);
  4. Ming-Ming Lai and Siok-Hwa Lau, “The Profitability of the Simple Moving Averages and Trading Range Breakout in the Asian Stock Markets,” Journal of Asian Economics (v.17/1, 2006);
  5. Thomas Liaw, Investment Banking and Investment Opportunities in China (Wiley, 2007);
  6. Shanghai Stock Exchange, “SSE Indices,” www.sse.com.cn (cited March 2009);
  7. Steven Shuye Wang and Michael Firth, “Do Bears and Bulls Swim Across Oceans? Market Information Transmission Between Greater China and the Rest of the World,” Journal of International Financial Markets, Institutions, and Money (v.14/3, 2004);
  8. K. Xu, “The Microstructure of the Chinese Stock Market,” China Economic Review (v.11/1, 2000);
  9. Hongquan Zhu et al., “Causal Linkages Among Shanghai, Shenzhen, and Hong Kong Stock Markets,” International Journal of Theoretical and Applied Finance (v.7/2, 2004).

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