On Wednesday the Shanghai Composite Index plunged through the psychological barrier of 2,000 points, making Shanghai the worst-performing market globally this year. It marked another sorry day for an index that has plunged from a level of 6,000 in October 2007.
Cue another new initiative to get the index moving upwards, this time a global roadshow from Chinese officials tasked with persuading international fund managers to put more money into the market. No doubt they will be repeating the message of China Securities Regulatory Commission chairman Guo Shuqing who took the unusual step earlier this year of suggesting that Chinese blue-chips offered “rare investment value”, returning as much as 8% a year.
But perhaps the real problem is the shoddy index itself? The Shanghai Composite’s popularity is partly a function of its long history. Starting in December 1990, it carries the longest uninterrupted stream of stock market data.
But the Composite doesn’t highlight blue-chip performance. Instead it includes every stock – more than 1,000 securities – listed on the Shanghai bourse. Large caps like property developer Vanke which are listed on the Shenzhen exchange – China’s other big stock market – aren’t even considered.
The China Securities Journal, a financial daily run by the Xinhua news agency, has also questioned whether “misrepresentative indices” have been undermining investor confidence, especially when the weighting of the Shanghai index is inevitably skewed towards state-owned giants. For instance, four Chinese lenders including ICBC and Bank of China make up for close to 45% of the index’s weighting.
Hence the search for a viable alternative. Step forward the CCTV Financial 50, which aims to become China’s answer to the Dow Jones Industrial Average. It was launched in late June this year as a new indicator, tracking data back to June 2010. And it is showing a 20% gain over the period (the Shanghai Composite fell close to 20% in the same timeframe) by offering a smaller index family as well as a radically different selection methodology.
The CCTV Financial 50 picks groups of 10 stocks under five criteria: growth, innovation, return, corporate governance and social responsibility. For instance, ICBC and Bank of China are picked for their ‘corporate governance’ credentials but their weighting is capped at less than 20% of the total index. In the ‘growth’ category are stocks like Kweichow Moutai (see WiC134), a rare breed these days in being above its 2007 bull market peak thanks to surging earnings.
The index also includes 11 firms listed on Shenzhen’s main board, differentiating it again from the Shanghai Composite.
And it seems like quality over quantity makes sense: the 50 index constituents accounted for more than 30% of the 2011 net profit of China’s listed firms that year. The per share dividends offered by the Financial 50 are also 2.65 times the national average.
Is CCTV onto a winner? As a state broadcaster, it certainly has the clout to showcase its index. And if its returns continue to look better than the Shanghai Composite, fund managers might look to track the Financial 50 rather than its bigger and longer-running rival. Smaller may end up being better: after all, the Dow Jones Industrial Average has been a mainstay of American investment life since its launch in 1896 and it includes just 30 stocks.
Then again, some in China have lost all confidence in the stock market. The Founder magazine said after the market’s latest dive that “no stock was suitable for retail investors”. It added that anyone gutsy enough to buy into the market was likely to come off the worse. Such folk should be prepared to “go in as a python and come out an earthworm; go in as a BMW and come out a bicycle.”
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