The Chinese Stock Exchange

Consists of two main exchanges

The Chinese stock exchange consists of the Shanghai Stock Exchange (SSE) and the Shenzhen Stock Exchange which are the two stock exchanges operating independently in the People's Republic of China. The Shanghai Stock Exchange is the world's 5th largest stock market by market capitalization.

Controls on Chinese Exchanges

The Shanghai Stock Exchange, unlike the Hong Kong Stock Exchange, is still not entirely open to foreign investors. This is a result of tight capital account controls exercised by the Chinese mainland authorities.

The China Securities Regulatory Commission (CSRC) directly administers the Shanghai exchange as a non- profit organization.

As Chinese stock markets have been deregulated by China's Securities Regulatory Commission, Chinese stock markets are becoming more and more mature and open, and are gradually being integrated into the global stock market.

Types of Chinese Stocks

There are two types of stocks being issued in the Shanghai Stock Exchange - A shares and B shares. A shares are priced in yuan and are open to foreign investors, while B shares are quoted in U.S. dollars and are open to Chinese mainland investors.

Some foreign investors are allowed, with some limitations set by the Qualified Foreign Institutional Investor (QFII) to trade in A shares.

Factors Influencing Chinese Markets

The Chinese stock market is trending toward integration and globalization, which is evidenced from the response of Shanghai Composite Index to movements in the Dow-Jones Index and FTSE100 Index.

The influence of the Dow-Jones Index on the Shanghai Composite Index is most significant, followed by the London SE index. This is partly a result of the larger market scale of the NYSE Euonext and London SE indices.

On 2008 figures, the NYSE Euonext ranked second, followed by London Stock Exchange (SE) and the Tokyo SE. The Shanghai SE, Hong Kong SE and Shenzhen SE rank seventh, tenth and fifteenth respectively.

Other influences affecting the globalization of the Chinese stock markets include:

  • the affect of the global financial crisis that sent shock waves through world stock markets
  • the listing of Chinese stocks on the London SE and the NYSE Euronext markets
  • the time differences between the Chinese stock markets with London and New York.
The most commonly used indicator to reflect SSE's market performance is The SSE Composite - also known as Shanghai Composite Index. The SSE Composite Index is comprised of all listed stocks (A shares and B shares) on the Shanghai Stock Exchange.

Proxies for the Chinese Stock Markets

Because of strict restrictions on direct investment by the average investor in Chinese investing stock, alternatives exist that provide indirect exposure.

The exchange-traded fund FXI may be considered a strong proxy for the overall Chinese stock market because it tracks 25 of the largest and most liquid of the Chinese stocks that are traded on the Hong Kong exchange.

The Australian stock market, and Australian resource companies in particular, are considered by some to be a proxy for the Chinese stock exchange because of the strong trading linkages that currently exist between the two countries.

Also Platinum Asset Management, a global absolute return fund, through its Platinum Asia Fund has consistently beaten the MSCII world index over a number of years. Platinum argues that the vastness of the Chinese market ... "has allowed it to attract leading edge technology and as such create a depth to its economy that many other emerging economies have failed to achieve".

Investment Concerns

There are several concerns which are currently limiting foreign investment in Chinese mainland stocks. These include ...

  • the ability of foreign investment funds to be easily moved out of China which reduces flexibility in investment
  • the ownership of significant stock in many large Chinese companies by the Chinese government, which limits the voice of other stockholders
  • poor governance standards exhibited by some foreign listed Chinese stocks which raises doubts about the governance standards of Chinese mainland listed stocks.

To Conclude ...

The Chinese stock exchange as represented by the Shanghai and Shenzhen markets is a growing force in world stock markets as China moves towards a more transparent and less mercantile position in terms of its international dealings.

I currently look for value investing opportunities in the Chinese stock exchange via the Platinum Asset Management Asia Fund in which I have an interest and in a major Australian resource stock. Other value investing opportunities may arise over time when direct investment in Chinese stocks may become available for retail investors.

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