China is the great economic power of the future. Therefore, Chinese stocks can be found in the portfolios of most global investors. We analyze the types of shares in China and the 10 most important stock market indices.
Content
- Introduction
- Types of Shares in China
- China’s 10 Most Important Stock Market Indices
- Summary of China’s Stock Market Indices
Introduction
China is the world’s second-largest economy, right behind that of the United States. And its economy continues to grow at a faster rate. According to forecasts by the Japan Center for Economic Research, a Japanese institution, the Chinese economy will overtake the United States in 2029.
For this reason, it should come as no surprise that China is also the second country in the world in terms of stock market capitalization. China is home to some giants of the corporate world, such as Alibaba, Tencent, CCB, and the Hong Kong stock exchange.
However, China still represents a small weight in the portfolio of most Western investors. This is because China is still considered an emerging country and, as a result, the amount of passive inflows has not been that significant. Additionally, there is a considerable risk premium making Western investors cautious about investing in China.
One example of the relatively little knowledge there is about the Chinese stock market is that more people are familiar with the stock market indices of the United Kingdom, Germany, and France, than those of China.
In this post, we will focus on the most important stock market indices in China. This will allow you to understand the market structure of the Chinese stock market, learn how Chinese listings work, and help you choose the best ETF to passively invest in China.
Types of Shares in China
To fully understand how companies are listed and traded in China, we need to be familiar with the different types of shares that exist:
Type H Shares: stock listed on the Hong Kong Stock Exchange and denominated in Hong Kong Dollars (HKD). All types of investors can invest in them, either directly or through funds.
Type A Shares: stock listed on the Shanghai or Shenzhen stock exchanges and denominated in Yuan (CNH). Individual stocks are usually available to domestic investors only. However, foreign investors can invest in them through regulated structures, such as ETFs and funds.
Type B Shares: stock listed on the Shanghai or Shenzhen stock exchanges but denominated in a foreign currency, typically US Dollars (USD) or Hong Kong Dollars (HKD). In general, these shares are available to all investors.
Red Chip: shares of companies from mainland China controlled, directly or indirectly, by the Chinese central government or one of the provincial or municipal governments. Interestingly, these shares are listed in Hong Kong. The same companies may also trade in Type H shares.
P Chip: shares of companies listed in Hong Kong with operations in mainland China, controlled by Chinese citizens, but domiciled in the Cayman Islands, Bermuda, or the British Virgin Islands.
ADR/GDR: Finally, there are also Chinese companies listed abroad. This can be in the United States through an ADR (American Depository Receipt) or in another stock exchange, commonly London, through a GDR (Global Depository Receipt). The most famous example is Alibaba’s ADR on the New York Stock Exchange (BABA).
China’s 10 Most Important Stock Market Indices
Next, we analyze the 10 most popular stock market indices for China, calculated by 5 different providers:
1) Hang Seng Index (HSI)
The Hang Seng is the most famous stock index of the Hong Kong Stock Exchange and therefore of China. Founded in 1969, it tracks the 50 largest companies listed on the Hong Kong Stock Exchange. These stocks fall into the categorie sof Type H, Red Chip and P chip shares.
The index is owned and published by Hang Seng Bank, a subsidiary of the British bank HSBC.
Although Hong Kong is partially independent from China from an administrative perspective, it is part of it. And its stock market is the most important in the country. Consequently, although companies are listed in Hong Kong, most of their economic activity takes place in the rest of China and around the world.
The stocks in the index are weighted based on their free float-adjusted market capitalization, so large companies tend to have higher weights. Some of the largest corporations include Alibaba, Tencent, PetroChina, Bank of China, China Construction Bank and HSBC.
The index is officially quoted in Hong Kong Dollars (HKD), a currency that is pegged to the US Dollar.
You will find more information about the Hang Seng index on its official website.
2) CSI 300
The CSI 300 (China Securities Index) is the main stock market index of mainland China. It is composed of the 300 largest companies listed on the Shanghai and Shenzhen stock exchanges.
Stocks listed on the Shanghai and Shenzhen stock exchanges, China’s two largest after Hong Kong, are traded in Yuan (CNH) and Type A shares, commonly referred to as A-Shares.
In this sense, the CSI 300 contrasts with the HIS in that it is more exposed to companies that carry out a greater portion of their economic activity in the Chinese domestic market.
In addition to having companies that are somewhat less internationalized, the CSI 300, due to its greater number of stocks, is also an index that offers us greater diversification.
It was introduced in 2005 by China Securities Index, a corporation owned by the Shanghai and Shenzhen stock exchanges. It also weights its companies according to their market capitalization adjusted for free float. Additional details can be found here.
3) Shanghai Stock Exchange Index (SSE Composite)
The Shanghai Stock Exchange Index, also known as SSE Composite, tracks all stocks listed on the Shanghai Stock Exchange. For this reason, it includes companies of all sizes. Although these are weighted according to their market capitalization.
The SSE Index contains both A-shares, denominated in local Chinese currency, and B-shares, denominated in foreign currency, commonly US dollars.
The SSE Index was introduced in 1991 by the Shanghai Stock Exchange with the aim of making it the main stock market index in mainland China. However, the subsequent introduction of the CSI 300, analyzed in the previous section, made it less relevant.
Nowadays, the SSE Composite is operated by China Securities Index (CSI). It is not really used by ETF providers but is a useful tool to analyze what happens to all the stocks listed on the Shanghai Stock Exchange.
4) SSE 100 Index
China Securities Index also calculates a special index for certain stocks traded on the Shanghai Stock Exchange. The SSE 100 Index is composed of the 100 companies with the highest income growth and return on equity rates.
Thus, of the 380 largest companies listed in Shanghai, the 100 that rank best according to those metrics are selected for the index. Therefore, the SSE 100 can be considered an index of high growth and profitable companies.
Stocks are weighted according to their market capitalization adjusted for free float.
You will find additional information on the website of the SSE.
5) MSCI China
The MSCI China Index includes all Chinese large and mid-cap stocks. The exact number of companies in the index varies over time, depending on how many of them meet the criteria to be part of it, but is usually around 700.
All types of stocks are eligible for this index, regardless of whether they are listed in Hong Kong, Shanghai, Shenzhen, New York or Singapore. Companies are weighted according to their market capitalization adjusted for free float, with the exception of A-shares, whose weighting is 20% of what would correspond to them based on their market cap.
This downward adjustment is made to take into account that most international investors cannot invest in A-shares directly and have to do so through a fund.
The index is published by the US company MSCI, which also calculates the famous MSCI World and MSCI Emerging Markets indices. You will find more details about the MSCI China on its official website.
6) MSCI China A
This is another useful index calculated by MSCI: the MSCI China A. The letter “A” serves to indicate that this index is composed exclusively of “Type A” shares.
“Type A” shares are those listed on the Shanghai and Shenzhen stock exchanges, in local currency (CNH) and usually not available to foreign investors. Because of these restrictions on “Type A” shares, investing in them through an ETF is usually the best option.
In this sense, the MSCI China A index has many things in common with the CSI 300 index, which is also composed exclusively of this type of stocks.
An important difference between the two indices is that the number of companies in the MSCI China A is not constant, although it is usually around 500, whereas the CSI 300 always has 300 stocks.
You can find additional information about this index on MSCI’s website.
7) FTSE China 50
The FTSE China 50 is an index published by FTSE Russell, a subsidiary of the London Stock Exchange. It is made up of 50 of the largest companies listed on the Hong Kong Stock Exchange, so it looks a lot like the Hang Seng Index (HSI), analyzed earlier.
Stocks within the index are weighted according to their market capitalization adjusted for free float. These are mainly “Type H” shares, although we will also find some Red Chip and P Chip stocks. Most of them are denominated in Hong Kong Dollars.
Among its largest weights we will find companies such as Alibaba, Tencent, JD.com and China Construction Bank.
If you are looking to invest only in the largest and most internationalized Chinese companies, both the FTSE China 50 and the Hang Seng are good options for an ETF.
You will find more details on the FTSE Russell website.
8) FTSE China A50
The FTSE China A50 is another index published by FTSE Russell. Also composed of 50 companies, its criteria are, however, very different from those of the FTSE China 50 index.
This index consists exclusively of A-shares, i.e., stocks denominated in local currency (CNH) and traded on the Shanghai and Shenzhen stock exchanges. Remember that direct investment in this type of stocks is restricted for most foreign investors. Therefore, an ETF tends to be the best option.
Because the number of companies that make up the FTSE China A50 is significantly smaller than that of other indices made up of A-shares, such as the CSI 300 or the MSCI China A, it allows us to focus on those with larger capitalization.
Here is the link to the official website.
9) Dow Jones China Offshore 50
The Dow Jones China Offshore 50 Index is comprised of 50 of the largest Chinese companies listed in Hong Kong and the United States.
Thus, many of the companies we find here can also be found in indices such as the Hang Seng or the FTSE China 50. However, the Dow Jones China Offshore 50 has an important difference.
In this case, the index contains many stocks listed in the United States in the form of ADRs (American Depository Receipts). This is because many of the big Chinese companies are listed in both Hong Kong and New York.
This index is published by S&P Dow Jones Indices, and you will find more details here.
10) S&P China 500
Finally, the S&P China 500, whose name closely resembles the American S&P 500, is made up of 500 of the largest Chinese companies, regardless of where they are listed or what kind of shares they are.
Therefore, we will find shares listed in Hong Kong, Shenzhen, Shanghai, and abroad. And quoted in several different currencies. The closest index would be the MSCI China.
Weights within the index are based on companies’ market capitalizations adjusted for free float. It can be a good option to invest in all kinds of Chinese companies, both those present around the world and those that focus on the domestic market.
More details are available on the official website of S&P Dow Jones Indices.
Summary of China’s Stock Market Indices
Because we have analyzed a total of 10 stock market indices for China and Hong Kong, with many differences between them, it can be very useful to see a summary with the most important characteristics of each of them.
The following table aims at making it easier for you to compare China’s stock indices so you can find the ETF that best suits your preferences:
With so many indices available and of different types, it will not be difficult for you to find something interesting invest in China.
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And if you want to read about the stock market indices of the largest capital market in the world, check out this link:
Top 7 Stock Market Indexes in the United States
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