- Markets & Risk Newsletter
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- A Wild Dragon: The SSE Composite Index Back in 1978, Jimmy Carter was wearing sweaters in the White House and the Bee Gees topped the pop music charts. But something momentous was happening in the People's Republic of China: under the leadership of Deng Xiaoping, the Chinese government began to open the doors to foreign investment. Just thirty-one years later, the Chinese economy is one of the fastest growing economies in the world, having maintained a consistent average annual growth of more than nine percent. The growth and accessibility of the Chinese economy, with a current GDP of US $3.25 trillion, have made Chinese financial instruments increasingly attractive to investors Established in 1990, the Shanghai Stock Exchange is one of three stock exchanges in China (the other two are the Shenzhen Stock Exchange and the Hong Kong Stock Exchange). The Shanghai Stock Exchange has nearly 900 listed companies with a combined market capitalization of US$ 4 trillion, making it the largest in China and second largest in the world. Some of the biggest companies listed on the SSE are PetroChina (as of 2008, the largest stock traded on the SSE), Bank of China, China Yangtze Power, Jiangxi Copper, and Wuhan Iron and Steel. But unlike the Hong Kong Stock Exchange, the Shanghai Stock Exchange is partially closed to foreign investors. The Shanghai exchange issues A shares and B shares. Only domestic investors can purchase A shares, while B shares can be purchased by all investors, including foreigners. China B shares are listed in the denomination of Renminbi, which is the Chinese national currency, but are payable in foreign currencies, making them accessible to foreign investors.
The SSE Composite Index Launched on July 15, 1991, the SSE Composite Index tracks all stocks (including both A shares and B shares) that are traded at the Shanghai Stock Exchange. The Base Day for SSE Composite Index is December 19, 1990. The Base Value is 100. The Base period is the total market capitalization of all stocks of that day. So how has the SSE Composite performed? For fifteen years it meandered around 1,500, reaching a high of 2,223 in June 2001 and sinking to 1,051 in May 2005. Volatility was low. But in early 2006 all of that changed, when the SSE Composite began a dizzying climb that took it to a high of 5,903 on October 12, 2007-an increase of nearly 400% in two and one-half years.
Then the roller coaster plunged, landing with a thud on October 31, 2008 at a dismal 1,728. How bad is that? In October of 2000, if you had invested $1,000 in an SSE Composite ETF, exactly eight years later you'd be holding just about the same amount.
The upturn came, reaching 3,471 by early August of 2009, and then another dive as the SSE Composite lost in the region of 21% of its value in late August. As we enter September the SSE Composite hangs at 2,600 and analysts are talking about the Chinese economy running out of steam. We are entering uncharted territory; in the past three years this sleepy index has become a wild dragon, taking investors on a white-knuckle ride that promises nothing except high volatility. There's money to be made in the SSE, but only for those who are well-informed and ready to weigh the risks. For information on powerful risk-management tools that allow you to track and measure the risk of international equity indexes, index futures and options, contact PortfolioScience today. |
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