The Shanghai Stock Exchange (SSE) is an equities, derivatives and debt marketplace located in mainland China. Headquartered in Shanghai, the SSE offers varying degrees of market access to both domestic and foreign investors. It functions as the largest of three official domestic stock exchanges.
In comparison to the Shenzhen Stock Exchange (SZSE) and the Stock Exchange of Hong Kong (SEHK), the SSE is the most valuable in terms of market capitalisation. In an attempt to foster cooperation and encourage domestic investiture, a collaboration between the three exchanges known as Stock Connect was instituted in 2014. Under the mutual market format, more than 2,000 equity products are available, including many local to the SSE A50 Index.
SSE: Evolution Of A Market
Beginning in the mid-1800s, Shanghai earned a reputation for being the financial center of the Far East. Located on the Yangtze River delta, Shanghai served as a prime location for shipping and trade. In the aftermath of the first Opium War, it was designated a "treaty port" by Great Britain. Shortly thereafter, Shanghai transitioned from being a small fishing village to the "Paris of the East."
As a treaty port, concessions were made to foreign parties seeking a foothold in China. American, British and French communities were able to exist autonomously, free from Chinese law. As a result, merchants, producers and speculators travelled to Shanghai to conduct business utilising a broad spectrum of assets.
Trade evolved rapidly until the elimination of Shanghai's treaty port status during the Japanese occupation of World War II. The ascension of the Communist party in 1949 brought a period of limited trade that endured until 1980.
By the latter portion of the 20th century, Shanghai markets evolved into premier venues for trade specialising in stocks, debt instruments and government bonds. A decade after the Chinese government adopted a strategic policy of "opening up", the modern incarnation of the SSE officially formed in November 1990.
Following its inception, the SSE experienced a period of rapid annual growth lasting more than 25 years. Its consistent success attracted traders and investors from around the globe and bolstered the SSE into being one of the leading equities markets in the world.
SSE: Size And Composition
Fueled by growth potential and optimism, the SSE has become a chief destination for those seeking a method of engaging Chinese equity offerings. In terms of aggregate market capitalisation, the SSE ranks among the world's elite markets. For the year 2016, it was the second-largest equities exchange in Asia and held high regard in comparison to the traditional pillars of finance:
|Market||Market Capitalisation||Global Rank|
|New York Stock Exchange||£13.9 Trillion||1|
|Tokyo Stock Exchange (TSE)||£3.6 Trillion||3|
|Shanghai Stock Exchange (SSE)||£2.9 Trillion||4|
|London Stock Exchange (LSE)||£2.5 Trillion||5|
Note: All currency values have been translated at .71 GBP to 1 USD.
The SSE consists of listed companies, securities and individual stocks. As of February 2018, listings include 1408 companies, 11,484 securities and 1,452 stocks. Of these holdings, many are incorporated into the leading indices of the SSE:
|SSE Composite||All SSE listed stocks, both A-shares and B-shares|
|SSE B Share||Exclusive to B-Share stocks|
|SSE 50||Exclusive to the 50 largest A-share stocks on the SSE|
|SSE 180||Exclusive to the 180 Largest A-share stocks on the SSE|
|SSE 380||Focussed upon 380 mid-size A-share stocks|
According to sector, listings on the SSE are dominated by the financial industry, but are representative of the entire economy:
|Mining||Less than 3 percent|
|Real Estate||Less than 3 percent|
|Retail and Wholesale||Less than 3 percent|
Although the SSE exhibits remarkable size, liquidity and volume, it has experienced periods of turbulence. Over the course of its history, the SSE has been defined by extreme swings in the value of listed companies. Periodic volatilities can be severe, featuring 10% fluctuations in primary indices. Reasons for the variance include margin investing, the percentage of total investment being retail, government policy and an abundance of initial public offerings (IPO) hitting the market.
Chinese equities are greatly influenced by an extensive regulatory environment. Government intervention impacts trade in a number of ways, mainly through the China Securities Regulatory Commission (CSRC). Granted authority by the State Council, the CSRC enforces the existing regulatory framework, ensures orderly markets and legal operation of China's financial venues.
An important directive set forth by the CSRC pertains to stock listing classifications. Three types of stocks are available for trade in China's markets: A-shares, B-shares, and H-shares. Each has a unique function, denomination and restrictions:
- A-Shares: A-shares are denominated in renminbi (RMB) and are available to domestic or foreign investors. International participants must meet a specific criteria to be recognised as Qualified Foreign Institutional Investors (QFII) before market access is granted.
- B-Shares: B-shares are listings available to foreign investors without the QFII designation. They are initially denominated in RMB, but are available to international participants primarily in U.S. dollars (USD) or Hong Kong dollars (HKD). Chinese investors may also access the market via a legal foreign currency account.
- H-Shares: H-shares are listed in Hong Kong and denominated in HKD. H-shares are openly accessible to anyone but still fall under the jurisdiction of the CSRC.
As in other major public equity markets, companies that wish to be listed on the SSE must meet several eligibility requirements to launch an IPO. The following guidelines apply to new listings:
- Approval from the CSRC
- Total market capitalisation must be more than RMB 50 million
- Shares offered to the public must exceed 25% of total issued shares. For companies with a market capitalisation better than RMB 400 million, only 10% is required.
- No major illegal acts or accounting falsehoods in the previous three years.
Upon satisfying the above requirements and gaining approval from the CSRC, a company may be listed on the SSE.
SSE: Organisational Structure
The SSE provides trading and investment opportunities facing publicly listed Chinese companies, bonds and derivative products. Operating within a strict regulatory framework, the organisational structure of the SSE is headed by the following internal bodies:
- General Assembly: The General Assembly functions as the supreme authority.
- Board of Governors: Commissioned with overseeing operations, the Board of Governors is the decision-making arm.
- President's Office: The Office of the President acts as a liaison between executive departments and the Board of Governors.
- Board of Supervisors: An independent supervisory bureau, the Board of Supervisors is in charge of regulatory oversight and adherence to existing laws.
In the spirit of promoting global cooperation, the SSE maintains membership in several international trade organisations:
- International Organisation of Securities Commissions (IOSCO)
- Asian and Oceanian Stock Exchanges Federation (AOSEF)
- World Federation of Exchanges (WFE)
- International Capital Market Association (ICMA)
- UN Sustainable Stock Exchange Initiative
The SSE is also affiliated with 46 foreign exchanges via a "memorandum of understanding." While limited in scope, the relationships promote a free flow of information and cooperation from mature markets to emerging ones.
China's Economic Prowess And The SSE A50
The transition of China from being a developing country to global force has created an international demand for equity products facing Chinese companies. The boom period of 2005 to 2010 fostered consistent and robust growth in gross domestic product (GDP). Upon posting a high in 2007 of 14.23% GDP, China gained notoriety as a budding economic superpower.
In 2010, amid the aftermath of the global credit crunch, performance in the equities and imports sectors flourished. For the year 2010, both imports and equities earnings appreciated in the neighborhood of 60%.
The high levels of performance gained the attention of corporate interests and equities investors worldwide. Foreign investiture poured into China, led by many household names in commerce. Apple (AAPL), Ford Motor Company, Coca Cola and Starbucks, among others, contributed to a total of £2.6 billion in foreign investiture for 2010.
Given the high levels of capital investment and tremendous labour force, China has developed into a global economic leader. Technically classified as a service-based economy, the nation tops the list in many categories:
|GDP (Purchasing Power Parity)||16.4 Trillion||1|
|Labour Force||806.7 Million||1|
|Direct foreign Investment||1.09 Trillion||6|
China's sustained economic success has gained the attention of capital market participants the world over. For international traders and investors, the SSE A50 index provides one of the most attractive means of capitalising on the potential of Chinese equities. Through engaging a diverse collection of leading companies on the A-share market, foreign investors are able to benefit from the aggregate growth of the Chinese economy.
However, it is a challenge for foreign nationals to directly access the A-shares market. Participation is limited to institutional investors with an approved QFII designation. As a result, retail traders and investors that reside outside of China engage A-shares indirectly via ETF, CFD or futures products.
The SSE A50 index acts as the basis for many of these products. A number of unique offerings are available, with the most popular being the FTSE China A50, iShares FTSE A50 China Index HKD and the E-mini FTSE China 50.
Shanghai has a rich and prosperous history as a leading destination for trade in the Far East. Coupled with China's economic growth of the last quarter century, demand for equity products has spiked. The SSE has been an integral part of satisfying the extensive appetite of international investors.
Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation…