China has a population of over 1.3 billion people, and the growth rate of the country has propelled it from the eighth largest economy to the second-largest economy in approximately 20 years. But that economy is not a free-market economy and its key stock exchange, the Shanghai Stock Exchange Composite Index (or SSE), is considerably more volatile than other exchanges.
That said, the SSE Composite is a good way for investors to get a snapshot of the economic health of China or, at the very least, of the companies that are listed on the exchange. The SSE Index itself is not weighted by market capitalization or by price, instead, it uses a formula with a base of 100. The formula for calculating the composite figure is as follows:
Calculating the value of the Shanghai Stock Exchange: Current Index = (Market Cap of Composite Members/Base Period) x Base Value
Investors who want a closer look at China’s countries by market cap can look at subsets of the SSS such as the SSE 50 Index and the SSE 180 Index which show market leaders by market capitalization.
China Is An Investment Opportunity For Americans
China and the Chinese economy represent a significant opportunity for American businesses but what opportunity exists for U.S. investors? China does not have a free market economy, but it does have a stock exchange that is similar to the major stock exchanges in other countries called Shanghai Stock Exchange. The Shanghai Composite Index (SSE Composite Index) is a stock market index based on stocks traded on the exchange. In this article, we’ll take a close look at the SSE Index and explain how it can benefit investors.
What is the Shanghai Stock Exchange Composite Index?
The Shanghai Stock Exchange Composite Index (or SSE) is China’s closest approximation to the S&P 500 Index or Dow Jones Industrial Average (DJIA) in the United States. The first day of reporting was July 15, 1991 and it was a monumental day for investors.
The Shanghai index is different from other exchanges in that it uses a Paasche weighted composite price index formula. This formula means the index is based on a specific base day for its calculations. The Shanghai index is set to the date of December 19, 1990, and the base value is 100.
The SSE Index measures both A-shares and B-shares. A-shares are shares traded in China’s domestic Renminbi currency. These shares are traded on the Shanghai and Shenzen stock exchanges. B-shares are also denominated in the Renminbi currency but are sold to foreigners who, due to Chinese government restrictions, cannot purchase A-shares.
Volatility And The Shanghai Stock Exchange Composite Index
Before considering investing in the SSE Index it’s important for investors to remember that many of the companies in China are state-run. This means the possibility of government decisions and extra risk, and therefore more volatility in the index.
For example, in an eight-month period between November 2014 and June 2015, the SSE climbed over 150%. This was due to state-run media outlets talking up Chinese companies but, after the large run-up, the index sank by 40% over the next three months. During that time, in an effort to prevent a market implosion, some companies suspended trading, short selling was outlawed, and the government took direct steps to support the market.
Another reason why the SSE Composite Index is volatile is the lack of large institutions investing in the index and this is because the index is relatively new. In mature markets, institutional investors and hedge funds that have to be invested 100% of the time, play a large role in maintaining liquidity at exchanges. Without those big players in place, the index is subject to overextension because there are no truly “buy and hold” investors.
Finally, because the Chinese government is interconnected with the exchange, it is a less attractive market for many investors. In the US, extreme policies are only used to shore up the market during major economic crises but this is not the case with the SSE Composite Index. Government intervention undercuts free-market principles on a daily basis and means the exchange can be seen as serving the government’s ends.
These Are The Sectors In The Shanghai Stock Exchange Composite index
Here are the top five sectors and weighting of the SSE index. Please note, the index is heavily weighted in favor of financial companies.
- Financials– This is the largest sector of the index at 25% of the weighting. Although down from the peak above 36% it has consistently carried the largest percentage weight in the index.
- Industrials – The industrial sector makes up roughly 20% of the index and its weighting is also down from the peak set in the early part of the 21st century.
- Materials - This sector began at less than 10% of the index but it has been growing slowly over the past few years and is now 10.6% of the total.
- Consumer Staples – This is another sector whose weighting is on the rise. This is noteworthy because China wants to shift its economy to a more consumer-driven one.
- Information Technology – This sector is about 8.5% of the index and is also growing along with China’s influence of global technology.
The Shanghai Stock Exchange Composite Index Isn’t For Every Investor
The Shanghai Index is a common index used to analyze the performance and direction of specific companies, sectors, and the general economy of China. Since Shanghai has become a financial hub in the world’s second-largest economy, the SSE Index can be critical in understanding what is happening in China’s economy – and the broader global economy.
The Shanghai index is a market composite index that is calculated by using a base period of 100, the market first started reporting on July 15, 1991. For investors who want to take a more targeted look at the Chinese market, they can look at other indexes such as the SSE 380, the SSE 180 or the SSE 50. As their names imply, these indexes look at the top 380, 180, or 50 companies respectively.
