The Shanghai Stock Market and its operation:
Let us start our study of the Chinese financial marketplaces with the Shanghai stock market which can nowadays be counted as one of the leading financial markets of this country. This major stock market first saw the light of day in 1891 but was closed for several decades after the creation of the Popular Republic of China in 1949. It was finally reopened in 1990. The Shanghai stock market is also known as the Shanghai Stock Exchange, or the SSE. It is one of the major financial marketplaces of China together with those of Hong Kong and Shenzhen.
The Shanghai stock market is also essentially a non-profitable organisation managed by the Regulatory Commission of the Chinese Stock Markets, or CRSC. It is therefore possible to invest in the Chinese stock markets through this entity. In fact, concerning the assets that are traded on the Shanghai stock market we of course find shares as well as funds and bonds. These assets however need to respect certain criteria including being issued by a company that has been active and achieved profits for at least three years to be able to enter this stock market. The Shanghai stock market unites two particular types of company quoted with two classes of shares that are traded in particular. These are ordinary shares and preferential shares. The first, the ordinary shares or Class A shares, are assets of which the share price is quoted in Yen and which, to be applicable for foreign investment, must pass through a specific programme named QFIL. The latter category of shares, the Preferential or Class B shares, are quoted in American dollars and are therefore open to foreign investment. This type of shares can be directly traded.
Although many investors even now tend to confuse the Shanghai stock market with that of Hong Kong, it should be noted that significant differences exist between them. It is actually the Hong Kong stock market that we shall next present in detail which is in fact the largest and most important of this country and which trades in ‘H shares’. These particular shares are issued by Chinese companies on this stock market and the prices are quoted in Hong Kong dollars. These shares were previously reserved for foreign investors but are now available to Chinese investors too. Concerning the Shanghai stock market, the largest part of its stock market capital is composed of shares from companies that were controlled by the state such as the major Chinese commercial banks and insurance companies. It was around 2001 that the majority of these shares came onto the market.
Finally, relating to the history of the Shanghai stock market, we particularly note that this has suffered severe consequences related to the global financial crisis of 2008 with a loss equivalent to two thirds of its current value, or 1,820.8 points which is equal to 3,000 billion dollars in stock market capital.
The Shenzhen stock market and its operation:
Another major Chinese financial marketplace is the Shenzhen stock market. Less well known that that of Shanghai it is however one of the three major stock markets of the Republic of China and is also known as the Shenzhen stock exchange or SZSE. This financial marketplace is based in the town bearing the same name and has existed since 1990, at the same time the Shanghai stock market was re-opened.
Concerning the trades completed on the Shenzhen stock exchange, we particularly note some interesting points such as the fact that this stock market, combined with that of Shanghai list over 1,200 companies with a combined stock market capital of 500 billion dollars which is equal to over 30% of this country’s GDP. These two financial marketplaces could therefore now be considered as serious rivals to the great Hong Kong stock market. Together these two stock markets take second place in terms of the largest Asian stock markets, just after the Tokyo stock market.
Still on the subject of the major factors relating to the Shenzhen stock market, we note that a platform has existed for a few years now between this stock market and that of Hong Kong. This platform was in fact implemented in 2016 with the objective of creating a gateway that enabled foreign investors to directly access Chinese company shares quoted in Yen while also enabling Chinese investors to access the Hong Kong market.
Regarding the companies that are specifically quoted on the Shenzhen stock market it should be noted that certain restrictions apply. In fact, on this stock market only companies with a stock market capital of over 6 billion Yen can be quoted as these are the only companies authorised by the Chinese government to open their capital to foreign investors.
The Hong Kong stock exchange and its operation:
We shall complete our summary of the major Chinese financial marketplaces with a brief presentation of the Hong Kong stock market. This is also known as the Hong Kong Stock Exchange or HKSE. It is, as the name indicates, the financial marketplace of Hong Kong.
The Hong Kong stock market currently boasts a total stock market capital of over 23,000 Hong Kong dollars which is the equivalent of over 2,990 billion American dollars which makes this stock market the seventh largest financial marketplace worldwide.
The operation of the Hong Kong stock market differs greatly from the other Chinese financial marketplaces, those of Shenzhen and Shanghai, concerning the authorised shareholders. In fact, to hold over 5% of the Hong Kong stock market you need to obtain the authorisation of the Hong Kong government. It should also be remembered here that up to 11 September 2007, the single largest shareholder of this financial marketplace was in fact this government holding over 5.88% of this entity’s stock market capital. This was followed by J P Morgan Chase with 5.54%, then Citibank with 4.13%, Horizontal Asset with 2.30% then other major investors.
Following the subprime crisis which took place in October 2007, the Hang Seng Index lost numerous points and plummeted over 60% in one year with a decrease in the market turnover which led to a drop in the rate of this entity.
Another interesting fact to note regarding the Hong Kong stock market is that the Chinese investors that wish to invest in it must first hold a portfolio worth at least 500,000 yen.
The different Chinese indices and which index you should prioritise for trading:
As we have just briefly explained, China is a complex financial market that has several major financial marketplaces including the two major ones at Shanghai and Shenzhen. However this market also includes other significant stock market indices.
There is also the Shanghai Shenzhen 300 Index that concerns these two financial marketplaces and which unites the top 300 companies quoted on the Chinese financial markets. However, the indices preferred by the investors are particularly the Shanghai Composite, or SSE Composite Index, and the Shenzhen Composite, or SHSE Composite Index.
However, as we briefly noted earlier, the ‘A’ shares that were previously reserved for the Chinese, and the ‘B’ shares that were not popular with the investors are still highly controlled by the state. Foreign investors therefore tend to prefer investing in the Hong Kong stock market which in fact accounts for a high number of ‘B’ shares issued by the leading companies in each activity sector. The principal index of the Hong Kong stock market is the Hang Seng China Enterprises Index which is uniquely composed of Chinese company shares quoted in Hong Kong and known as ‘H’ shares.
There is however another more global index of the Chinese stock markets, the MSCI China Index, which unites the majority of Chinese companies quoted on the Shanghai, Shenzhen and Hong Kong stock markets as well as the Chinese companies quoted on foreign stock markets such as Singapore or the United States.
One may therefore ask which Chinese index is preferable for making investments. Foreign investors generally prefer the Hong Kong stock market given that the Chinese authorities maintain overall control on the investments. The Hang Seng China Enterprise stock market index is in fact less volatile than the other Chinese stock market indices with a maximum loss of 50% since its highest point achieved in 2007 compared with a 65% drop for the Shanghai Composite Index. This is the reason why this stock index is often very popular with traders. However, and if you are looking to implement a strategy based on greater volatility, you should favor the Shanghai Composite index which undoubtedly has higher volatility than the others. This index can register both declines and bullish rebounds stronger than other indices in the country and will therefore be reserved for the most experienced traders. Finally, the most undecided investors can always turn to the MSCI China index which brings together, let us remember, companies listed on both the Shanghai stock market and that of Hong Kong as well as on the markets of Shenzhen, Singapore and sometimes New York.
Of course, nothing obliges you to invest directly in these indices, you can also choose to trade on the large Chinese financial marketplaces using CFD contracts and take position directly on the major share prices available on this country’s stock markets.