The Shanghai Composite Index has seen extreme volatility, driving global equity markets. Understand the index before you draw conclusions on its interlinkages.
Constituents for Shanghai Stock Exchange (SSE) Composite Index are all listed stocks (A shares and B shares) at Shanghai Stock Exchange. The Base Day for SSE Composite Index is December 19, 1990. The Base period is the total market capitalization of all stocks of that day. The Base Value is 100. The index was launched on July 15, 1991.
The index is calculated using the Weighted Average Market Capitalization methodology where the price multiplied by the free float gives the market capitalization of its constituents. The base value of the index is 100 on 19th December 1990. The weightage of each company is arrived at by dividing the market capitalization of each company with the total market capitalization of all the listed companies. The larger the market weightage of the company the larger is the impact due to 1% change in its price on the index.
Constituents of SSE Composite Index are reviewed every 6 months. Constituents are adjusted according to the periodical review. Meetings of SSE Index Advisory Committee are usually held in the end of May and November every year and constituents adjustment are implemented on the next trading day after the close of the second Friday in June and December each year.
The real time calculation of SSE Index is based on the price data issued by the trading systems of the two exchanges. The opening index is calculated by the opening price obtained through the daily aggregate auction. In case there is no deal, the opening index is then calculated by the reference opening price provided by the quotation system.
The index is calculated each second till the close of trading.
Price of each constituent(X) is defined on the following principle:
If there is no deal the whole trading day, X equals the reference opening price, otherwise, X equals the latest traded price. SSE decides whether to calculate the indices in case of abnormal quotations from the two exchanges.
Circumstances for index maintenance
a) New constituent for SSE New Composite Index: stocks completed Split-share Reform will be added to the Index on the second trading day after implementation.
b) New listing: A newly issued stock is included in index calculation on the initial trading day since September 23, 2002.
c) Dividend: no index adjustment is required for dividend payment and the index is allowed to fall back naturally.
d) Right issue and bonus issue: the index is adjusted the day before the issuance. Adjusted Market Cap after the Adjustment = Adjusted Price × Adjusted No. of Shares + Adjusted Market Cap before the Adjustment (excluding stocks adjusted for right issue and bonus issue)
e) Suspension from trading: Use last trading price to calculate index until trading is resumed.
f) Delisting: Adjust the index the day before the delisting.
g) Share changes: when shares of constituents change due to other reasons (e.g. re-issuance, listing of right issue, listing of employee shares), the index is adjusted the day before the changes.
h) Exchange rate changes: indices are adjusted according to applicable exchange rate (middle price between RMB and US dollar on the last trading day of each week) at China Foreign Exchange Trading Center.
i) Stop trading: The Index will be calculated as usual if some constituents stop trading; the Index will not be calculated if all constituents stop trading.
The SSE Composite has declined 36.6% on a year on year basis and has declined 7% year to date. The index reached an all-time high of 6092.06 in October 2007. The index has a Price to Earnings ratio of 15 in the current scenario.
