Banking & Finance

Market mover

Shanghai tweaks its benchmark to boost its sluggish performance


Shake up at the Shanghai Comp

Whether a stockmarket index is considered a ‘benchmark’ or not often comes down to how often it gets mentioned in the media. But the Shanghai Composite Index (SHCOMP) in China is classed as one simply because it has been around the longest.

The index was set up in December 1990. At the time Shanghai had the only stock market in China (opening up before Shenzhen, see WiC236) and the SHCOMP was the only equity tracker available. For analyts watching the performance of China’s stock market from incep-tion, the SHCOMP offers the only uninterrupted stream of market data over the past 30 years. Even today it remains the most discussed index in the A-share market.

A longstanding problem, as we noted as far back as 2012 (see WiC166), is that the SHCOMP is not a ‘blue chip index’ by nature. It tracks the performance of all the companies – more than 1,600 stocks as of this week – listed on the Shanghai bourse.

Their weightings are decided by their market capitalisation, which includes the large amounts of illiquid shares still held by the state. That means the SHCOMP has always been overly dominated by banking and energy heavyweights. But as growth at these state-controlled giants slows, so too does any upward momentum for the SHCOMP. By extension it becomes a drag on the perceived performance of the “Chinese stock market” which the index has come to represent.

The SHCOMP traded below the 3,000-point level 10 years ago, China Securities Journal noted, and today it is still hovering at the same level, despite China’s economy doubling in size during the same period. As such it has reinforced the view that China’s stock market is too illiquid, and has hardly grown over the past decade.

Likewise, by focusing only on Shanghai-listed firms, the benchmark ignores the companies on other bourses.

For instance, the ChiNext, a growth enterprise board launched by the Shenzhen stock exchange in 2009, has risen 35% so far this year (after a 43% gain in 2019) largely thanks to the stellar performance of the biotech sector. The SHCOMP, however, is down 2%.

Driven by a growing concern that investors – including foreign fund managers – might switch their focus to the Shenzhen bourse, officials in Shanghai have finally decided to rejig the SHCOMP for the first time in three decades.

From July 22, the index will include stocks listed on Shanghai’s own tech bourse, the STAR Market. The move, Shanghai Securities News said, is designed to increase the weighting of companies with emerging technologies. So-called “red chips”, or firms listed overseas but operating in China, will also be included if they also choose to sell shares in Shanghai by issuing China Depositary Receipts (CDRs).

By the end of May, 105 companies had debuted on the STAR Market, with a total market value of Rmb1.6 trillion ($225.6 billion).

Potential red-chip returnees include semiconductor maker SMIC and carmaker Geely. Both are now listed in Hong Kong.

Meanwhile, more of the companies that get delisting warnings from Shanghai regulators (aka the special treatment or ‘ST stocks’, which receive the notification after three consecutive years of losses) will face removal from the index unless they can get back to profit in an agreed period.

More changes could follow, courtesy of a task force set up to ask for advice from international fund managers and foreign index compilers, as the Shanghai stock exchange sets out to make its benchmark index more representative.

Promoters of the exchange hope that the SHCOMP might then be able to catch up with the stock market bull runs on other bourses, including those seen in Hong Kong and Shenzhen over the second quarter. Everbright Securities, for one, expects that with the recent changes the SHCOMP is likely to hit 4,000 points relatively soon, implying a 30% upside versus current levels.

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