SSE Composite
What Is the SSE Composite?
The SSE Composite, short for the Shanghai Stock Exchange Composite Index, is a stock market composite made up of all the A-shares and B-shares that trade on the Shanghai Stock Exchange (SSE). The index is calculated by utilizing a base period of 100. The principal day of reporting was July 15, 1991.
Calculating the SSE Composite Value
The composite figure can be calculated by utilizing the formula:
Understanding the SSE Composite
The SSE Composite is an effective method for getting a broad outline of the performance of companies listed on the Shanghai exchange. More particular indexes, for example, the SSE 50 Index and SSE 180 Index, show market leaders by market capitalization.
With a population of over 1.4 billion and a growth rate throughout recent decades that saw the country climb eight spots to second in the world in terms of GDP, China is an economic force. Nonetheless, the country's stock market volatility has featured that, while China is a world power, it isn't through with its developing pains.
Volatility in the SSE Composite
The SSE Composite is famously volatile. As an example, between June 2014 and June 2015, the SSE Composite shot up over 150% (going from 2,000 to north of 5,000), as the state-run media outlets talked up Chinese equities and encouraged inexperienced investors to buy them.
Quite possibly of the biggest factor in this stock market correction was the lack of experience that China had in dealing with a stock market. Although far from perfect, most US exchanges have methods of easing back the market to allow at trading during falling costs while subtly pushing back against the all-out panic that can be disastrous.
These incorporate the circuit breakers that kick in when the market plunges too fast. At the time, China just had a mechanism by which a company could suspend trading for an undefined period of time worked out between the company and the regulator.
The stock market circuit breakers on the New York Stock Exchange (NYSE), by contrast, are not company-explicit and are intended to allow investors to catch their collective breath through temporary halts.
This lack of a defined market failsafe in China prompted an ad hoc approach of whatever the government chose. And that left the door open to cutting interest rates, threats to arrest sellers, strategic trading suspensions, and directions to state-owned ventures to start buying.
Special Considerations
Another factor contributing to volatility in the SSE Composite and Chinese stocks, in general, is the lack of stock market players. China's stock market is relatively new and mainly made up of individuals. In most mature stock markets, the majority of buyers and sellers are actually institutions, when measured by volume.
These big players have risk tolerances that are far not quite the same as the individual investor. Institutional buyers, particularly hedge funds, play an important job in maintaining liquidity in the market and shifting risk onto substances that can usually handle it.
Even with those big players, things can and frequently turn out badly. That said, a market dominated by individual investors — particularly a large number of individual investors trading on margin — is apt to see overreactions on the way up and the way down.
The job of the Chinese government is entwined with the maturity issues the Chinese stock market faces. Governments mediating in the stock market is the same old thing, but the eagerness with which the Chinese government hopped into the market troubled many.
Most countries put off mediating until it is clear a systemic meltdown is unavoidable. Nonetheless, the Chinese government wanted to mediate emphatically in 2015, perhaps because its policy choices helped build up the bubble in any case.
This also set a hands-on precedent for future market events, which undermines free market forces. The potential outcome — a Chinese stock market that is profoundly regulated to fit government closes — is a less attractive market for international investors.
China's Failed Experiment With Circuit Breakers
While the SSE Composite regained a few ground between September and December of 2015, the index transformed sharply lower heading into 2016. On Jan. 4, 2016, the Chinese government put another circuit breaker in place trying to add stability to the market by avoiding colossal drops like the ones the SSE Composite experienced in 2015.
Also known as a trading curb, circuit breakers have been executed in stock markets, and other asset markets, around the world. The goal of a circuit breaker is to halt trading in a security or market to prevent fear and panic selling from collapsing prices too rapidly and without a fundamental basis, and prodding more panic selling simultaneously.
Following a large decline, a market may be halted for a number of minutes or hours, and then resume trading once investors and analysts have had a chance to process price moves and could see the sell-off as a buying opportunity.
The goal is to prevent a free fall and balance between buyers and sellers during the halt period. In the event that markets keep on falling, a second breaker may trigger a halt until the end of the trading day. At the point when a halt happens, trading in associated derivative contracts, for example, futures and options, is also suspended.
U.S. Circuit Breakers
Circuit breakers were first imagined following the stock market crash of Oct. 19, 1987, also known as Black Monday, when the Dow Jones Industrial Average lost nearly 22% of its value in a single day, or half a trillion dollars.
They were first carried out in the United States in 1989 and were initially based on an absolute point drop, rather than a percentage drop. That was changed in updated rules put into effect in 1996, then in 1997.
In 2008, the Securities and Exchange Commission (SEC) put into effect Rule 48, which allows for securities to be halted and opened more rapidly than a circuit breaker would allow in specific situations before the opening bell. This rule was last utilized in 2015, in any case, and eliminated in 2016.
In the US, for example, assuming the Dow falls by 10%, the NYSE can halt market trading for 15 minutes, or the whole day, contingent upon the level. The size of a drop is a measure that will decide the duration of the halt. The larger the decline, the more extended the trading halt. For Levels 1 and 2 (a 15-minute half) the decline is 7% and 13%, and for Level 3 (whole day shutdown) the level is 20%.
There are similar breakers in effect for the S&P 500 and Russell 2000 indices as well, and for many exchange-traded funds (ETFs). Global markets, too, have executed curbs.
The goal of a circuit breaker is to prevent panic selling and reestablish stability among buyers and sellers in a market. Circuit breakers have been utilized a number of times since their implementation, and they were crucial in stemming an outright market free-fall after both the dot-com bubble burst and the fall of Lehman Brothers.
Markets kept on declining after those events, yet the selling was significantly more orderly than it in any case might have been. Nonetheless, the situation with China's circuit breakers was entirely different.
China's Circuit Breakers
The circuit breakers enacted by the Chinese government on Jan. 4, 2016, stated that on the off chance that the benchmark CSI 300 index, which is made up of 300 A-share stocks listed on the Shanghai or Shenzhen Stock Exchanges, falls 5% in a day, trading would be halted for 15 minutes. A 7% decline would trigger a halt in trading until the end of the trading day.
The very day the breaker was put in place, a circuit breaker was triggered. On Jan. 7, 2016, it was triggered again. Chinese regulators announced they were suspending the circuit breakers, just four days after they had been put in place.
The suspension was meant to create stability in equity markets, where — ironically — the inclusion of such circuit breakers was originally meant to maintain stability and continuity in markets. While eliminating breakers could mean panic-driven free fall in prices, free-market advocates argue that markets will take care of themselves, noticing that trading halts are artificial barriers to market proficiency.
Features
- The SSE Composite is a benchmark market-cap weighted equity index made out of A-and B-shares on the Shanghai Stock Exchange.
- A large part of the total market cap of the SSE is made up of formerly state-run companies like major commercial banks and insurance companies.
- The Shanghai Stock Exchange (SSE) is the largest stock exchange in mainland China.
