Date
24 November 2017
The Shanghai Stock Exchange had around 860 listed firms by the end of 2007, but the number has now soared by nearly 60 percent to 1,357. Photo: Shanghai Stock Exchange
The Shanghai Stock Exchange had around 860 listed firms by the end of 2007, but the number has now soared by nearly 60 percent to 1,357. Photo: Shanghai Stock Exchange

Has Shanghai stock market really done so badly over past decade?

The Hang Seng index recently closed at its highest level in a decade. In contrast, the Shanghai market hit 3,378 points, almost halving its previous high of 6,124 points set on Oct. 16, 2007.

Does that mean mainland investors have suffered huge losses from stock investments over the past 10 years? Well, not exactly.

Let’s take a look at the historical background.

In 2007, the Chinese government introduced a reform aimed at turning so-called non-tradable shares into tradable ones, which accounted for nearly two-thirds of the overall market.

In theory, a vast increase in share supply is not good news for the market, but at that time, the market took it as a positive trading cue.

Investors applauded the reform for three things they expected to happen.

First, the reform would make state-owned shareholders more conscious of safeguarding share prices. Second, it would facilitate merger and acquisition activities. Third, it’s widely speculated that the central government would try to boost the market first before introducing the reform.

Anyway, the reform served as a huge catalyst, and the Shanghai Composite Index soared to a peak of 6,124 points on Oct. 16, 2007, from only 1,200 points in early 2006, spiking more than four times in less than two years.

Unfortunately, the expected merits didn’t materialize and soon the global financial crisis broke out. The Shanghai market slumped by over 70 percent to a trough of 1,729 points at the height of the meltdown in 2008.

The Shanghai Composite Index closed at 3,378 points on Monday, still 45 percent lower than the peak a decade ago.

Nonetheless, today’s index is not exactly comparable to the index 10 years ago.

Unlike most other leading stock indices that track only a certain number of blue-chip stocks, the Shanghai Composite Index covers all the listed firms in the market. So the base of the index keeps expanding over the years.

The Shanghai Stock Exchange had around 860 listed firms by the end of 2007, and the number has now soared by nearly 60 percent to 1,357.

The total market value and circulated market value of all listed firms in 2007 were 27 trillion yuan (US$4.08 trillion) and 6.4 trillion yuan respectively, compared with 33 trillion yuan and 28 trillion yuan respectively at present, up 22 percent and 337.5 percent respectively.

In the meantime, circulated market value now accounts for 85 percent of today’s market value, compared with only 24 percent in 2007.

Up to 40 percent of the 1,357 listed companies were not listed yet 10 years ago.

A better way of comparing is to look at the performance of the 860 firms already listed 10 years ago over the decade.

In fact, up to 70 percent of them have already exceeded their previous peaks in 2007 on a split-adjusted basis, according to data from Wind.

For instance, heavyweights like China Life Insurance Co. (601628.CN), Kweichow Moutai Co. (600519.CN) and Ping An Insurance Group Co. of China (601318.CN) all have posted whopping gains during the period.

The average P/E multiple of the Shanghai Composite Index was 54 times during the peak in 2007, but now it stands at 18.3 times. That means listed companies have considerably boosted their profitability during the last 10 years.

An average investor who bet on Chinese equities a decade ago is most likely sitting on some decent profit today.

This article appeared in the Hong Kong Economic Journal on Oct. 17

Translation by Julie Zhu with additional reporting

[Chinese version 中文版]

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RT/CG

Hong Kong Economic Journal columnist

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