China is the first- or second-largest economy in the world, depending on how you measure it, with a 2019 nominal GDP of over $14 trillion that grew at a roughly 7% clip since 2012. Given the country’s growing influence, international investors have been increasingly interested in its stock markets. In fact, many of the world’s largest initial public offerings have been raised through its markets, including the Agricultural Bank of China’s $22.1 billion IPO in 2010.
The most popular stock exchange for Chinese stocks is the Shanghai Stock Exchange, which has a market capitalization of about $7 trillion, as of June 2021, making it the third-largest in the world. The stock exchange first opened in 1866 but experienced its greatest growth after 2005. While it is not entirely open to foreign investors yet, the stock exchange remains an extremely important gauge of the country’s economic health with 1,912 listed public companies, as of June 2021.
The Shanghai Composite Index
The Shanghai Composite Index is a stock market index of all the stocks listed on the Shanghai Stock Exchange. Like the NYSE Composite or the NASDAQ Composite in the United States, the index is designed to show the overall performance of the stock market at any given time, with a base value of 100 being issued on December 19, 1990. The index includes all stocks – both A and B shares – that trade on the Shanghai Stock Exchange, weighted by market capitalization.
For international investors, the Shanghai Composite Index provides an easy glimpse into the health of the Chinese stock market, which may be difficult to obtain elsewhere. Most investors are relegated to trading exchange-traded funds (“ETFs”) or American Depository Receipts (“ADRs”), which rarely include all of China’s major publicly traded companies. This means that the SSE Composite Index and related indexes may be the best way to assess overall performance rather than ADR performance.
International investors can find information about the Shanghai Composite Index on SSE’s website.
Other SSE Indices to Follow
The Shanghai Composite Index may be the most quoted Chinese stock market index, but the SSE also provides three other indices for investors to follow, including the SSE 50, SSE 180, and the SSE 380. Simply put, these indices track the 50, 180, and 380 largest members of the Shanghai Composite Index in much the same way that the S&P 500 tracks the 500 largest US stocks. But it’s worth noting that many of China’s largest companies are government-owned or heavily regulated.
Aside from these popular options, the SSE also offers a range of market capitalization, asset class, or industrial classification-based indices for investors to follow. These options range from the SSE Consumer Staples Sector Index to the SSE 180 Value Index to the SSE Corporate Bond 30 Index, offering investors a wide range of options when researching the economy. For instance, investors might look at the Consumer Staples Index to see how consumer goods companies are performing.
A full list of these indices can be found on SSE’s website.
Investing in the Shanghai Composite Index
International investors looking to invest in the Shanghai Composite Index have many options on the surface, but few of them are able to truly mimic its performance. While there are many different Chinese ETFs available in the US, it has become common for them to experience significant divergence from the performance of the current Shanghai Composite Index.
This occurs because the Shanghai Composite Index tracks “A” shares, which are only accessible to local investors and not international funds. Since this market has less liquidity and substantial weighting in smaller companies, the performance can be quite different than popular Chinese ETFs like the iShares China Large-Cap ETF/FTSE China 50 Index (FXI) that invest in “H” shares.
That said, investors simply looking for exposure to China have many options, including:
International investors should keep in mind that there are many unique risk factors to investing in China compared to domestic US companies. For example, the Chinese government takes a much more active role in regulating companies within its borders, which introduces higher levels of political risk. There may also be currency-related risks stemming from the central bank’s actions to control the valuation of the yuan.