A stock market index is a measurement of a portion of the stock market. It is calculated from the prices of selected stocks (often a weighted average). It is a tool used by financial managers and investors to describe the market, and to compare the return on specific investments. Below you will find an interactive chart of the Shanghai Composite Index. What is the Shanghai Composite Index?
China has a population of over 1.3 billion people. The growth rate of the country has propelled it from the eighth largest economy (in terms of GDP) to the second-largest economy in approximately 20 years. But that economy is not a free-market economy, and as such, the Shanghai Stock Exchange Composite Index (or SSE) is considerably more volatile than other exchanges.
That being 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:
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, and the Chinese economy represents 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 indexes in other countries called the Shanghai Stock Exchange Composite Index (SSE Composite Index). 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 the 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.
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 of the Renminbi currency. These shares are traded on the Shanghai and Shenzen stock exchanges. B-shares are also denominated in the Renminbi currency but are owned by foreigners who, due to Chinese government restrictions cannot purchase A-shares.
The Shanghai Stock Exchange Composite Index is known to be volatile
Before considering investing in the SSE Index it’s important for investors to remember that many companies in China are still state-run. The possibility of government decisions adds extra risk, and therefore more volatility to the index.
For example, in an eight-month period between November 2014 and June 2015, the SSE climbed over 150%. This was due to the state-run media outlets talking up Chinese companies. However, after that large run-up, the index sank by 40% over the next three months. Some companies suspended trading, short selling was outlawed, and the government directly took steps to support the market. At the time, this collapse was due to a lack of circuit breakers – at least as investors think of them in the United States.
Another reason why the SSE Composite Index is volatile is the lack of large institutions that are investing in the index. Some of this is because the index is relatively new. In mature markets, institutional investors, notably hedge funds, play a large role in maintaining liquidity in the exchange and shifting risk. Without those big players in place, the index is subject to more overreaction – particularly since many individuals that trade the SSE Composite engage in margin trading.
Finally, because the Chinese government is interconnected with the exchange, it is a less attractive market for many investors. Although some of the United States Federal Reserve policies since the economic crisis (most notably the program known as quantitative easing) can prop up U.S. exchanges, these steps are only used to avoid a systemic meltdown. This is not the case with the SSE Composite Index. Government intervention, however, undercuts free-market principles and means the exchange can be seen as serving the government’s ends.
What sectors are represented in Shanghai Stock Exchange Composite index?
Here are the sectors and weighting of the SSE index. All data is current as of July 31, 2019.
- Telecommunications – This sector carries the lowest weighting in the index at just 2.5%.
- Consumer Discretionary – This sector is declining in weighting and now makes up 7.8% of the index. This is down from 9.93% at the end of 2017.
- Consumer Staples – This is a rising category that now makes up 8.3% of the index. At the end of 2017, this sector made up just 6.3% of the index.
- Energy – The energy sector makes up about 7.8% of the index. It is down from 2017 and 2018 levels when it made up over 9% of the index.
- Financials – This is the largest sector of the index, carrying 36.10% of the weighting. This is up from 33.4% at the end of 2017. Although the weighting has been as low as 31.75%, it has consistently carried the largest percentage weight in the index.
- Health Care – The health care sector is 4.70% of the weighting. Over the last two years, it briefly comprised over 5% of the index but has otherwise stayed fairly close to its present level.
- Industrials – The industrial sector makes up about one-sixth of the index. It currently comprises 16.4% which is down nearly 2% from where it was at the end of 2017 (18.05%).
- Information Technology – This sector carries 4% of the index’s weighting.
- Materials - This sector has historically represented less than 10% of the overall index. In 2019, the components in this sector make up just 8.10% of the index. At the end of 2017, this sector was about a percent higher at 9.11%.
- Utilities – This sector makes up 4.3% of the index. This has been stable over the last two years.
The final word on the Shanghai Stock Exchange Composite Index
The Shanghai Index is a common index used to analyze the performance and direction of specific companies, sectors and the general economy of Shanghai. Since Shanghai has become a financial hub in the world’s second-largest economy (in terms of GDP), 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.