Shanghai Composite in a phase of consolidation

By Mihir Gupta (UCL), Ameya Joshi (UCL), Sukrith Kumar (UCL) and Filippo Palacino (ETH Zurich)


Index Overview


The Shanghai Stock Exchange (SSE) Composite index tracks the daily price performance of all stocks, including A shares and B shares, that are traded on the Shanghai Stock Exchange. The index is calculated based on the Paasche weighted composite price index formula, which means that the index is weighted by capitalisation, relative to a particular base period on a specific base day. The base value given was 100, on the base day, which was 19th December 1990.

The top 10 companies with the greatest weighting, hence largest market capitalization, in the SSE Composite index, are as follows:


Table 1: Top 10 companies with the greatest weighting on the Shanghai Composite


Macroeconomic Overview


We have incorporated a two-fold macro analysis strategy to analyse the macroeconomic situation in China that may significantly impact the short term trajectory of the Shanghai Composite. We first analyse data from a series of PMI Manufacturing, Services and eco-political indicators and follow it with potential forecasted movements of the index, based on the historic movements of these indicators.


Table 2: Manufacturing and Services PMI data for China (Toggle.ai as on 25/12/2021)


As observed in Table 2, the manufacturing arm of the Chinese economy seems to be gaining momentum once again. Provided that the Chinese manufacturing story is heavily driven by an amalgamation of both, the international as well as the domestic elements - the strong PMI numbers for New Export Orders as well as New Orders seem to suggest that both of these factors are at inter-play here. However, the Services data seems to suggest that while the domestic demand and supply seems to be catalysing the New Orders component, there still remain significant barriers to international arm. This may be inferred from the relatively low percentile vs 5 year statistic for the CHN Services National Bureau of Statistics of China New Export Orders PMI component.


Table 3: Eco-political indicators for China (Toggle.ai as on 25/12/2021)


As far as the eco-political indicators are concerned, we conclude that there is no doubt about the economic surprise index being so high because of the spillover effects that have persisted due to the pandemic. In the case of the geopolitical risk landscape, we believe that the recent tensions near the Indo-China border, the rising disputes in the South China Sea, complemented with the shaky US-China relationships are arguments that support the relatively low %tile statistics for the CHN PRS PRS Composite Eco-Political and the CHN Geopolitical Risk, respectively. Finally, the extremely high political stability may majorly be accounted to the extremely strong foothold the CPC (Communist Party of China) has in the case of maintaining the political equilibrium and handling political affairs in China.


Graph 1: Forecasted trajectory of the Shanghai Composite conditional on China’s Citi Economic Shock Index (Toggle.ai as on 25/12/2021)