This revamp’s goal is to create a benchmark that reflects better the new Chinese economy. First launched in 1991 the Shanghai stock exchange had been under criticism for several years. Ge Shoujing, senior analyst at the Reality Institute of Advanced Finance in Beijing said: “There has been ages-long criticism that the Shanghai composite index did not reflect the real economy, which could be a problem given the number of investors and funds tracking it,” According to analyst this may give more weighting to the booming high-tech industry, while it may reduce the weighting of finance and energy industries firms. For example, the Industrial & Commercial Bank of China and Agricultural Bank of China Ltd. which currently account for more than one-third of the weighting.
The overhaul will attempt to give better opportunities for Chinese tech giants like Alibaba, Tencent, and JD to trade locally instead of trading in overseas exchanges like New York and Hong Kong. The new index will calculate the market value of a company based on the free-float of shares versus the total amount of shares. This move will allow to provide a narrower view on the company’s active shares and bring the index in line with gauges like S&P500. Wang Zhuo, fund manager at Shanghai Zhuozhu Investment Management commented: “The revamp will finally break the curse of the Shanghai composite being perpetually stuck at 3,000, as retail investors like to joke about in dark humour,” This revamp is part of a major effort to place Shanghai as a leading stock market in Asia, which in turn would make the city’s exchange a viable rival to Hong Kong stock market, with a higher market capitalization. Last year the city launched the Shanghai’s Star Market, a new Nasdaq-style tech board that aimed at attracting more biotech start-up companies.
This new Shanghai stock market index will fine-tune new entries and reduce the number of loss-making firms. In the past companies would have to wait 11 days after their initial offering to start joining the index, that means a lot of the potential gains from initial trades would be lost. This marks a new era of stock exchange in China, as the new index will be more representative of the new Chinese economy and its incredibly fast pace dynamics: an exciting step forward that will help the city become one of the largest stock markets in the world.
This is exciting. A positive move forward for the city, a fresh start to attract new investors, for the numbers have yet to rise, the sky has no limit!