Shanghai Stock Exchange

Introduction

The Shanghai Stock Exchange (SSE) is based in the city of Shanghai, China. This stock exchange is one of the two exchanges that operate independently in the People’s Republic of China (other stock exchange is Shenzhen Stock Exchange).

In terms of the market capitalization, the Shanghai Stock Exchange is the fifth largest exchange in the world. As of December, 2011, its market capitalization was US$ 2.3 trillion.

While Hong Kong Stock Exchange in Greater China is entirely open to international investors, the Shanghai Stock Exchange keeps few restrictions on foreign investors. Tight capital account controls are maintained by the Chinese authorities in Mainland China.

Re-established in November, 26, 1990, the SSE is directly administered by the China Securities Regularity Commission (CSRC).  It is a non-profit organization and became operational from 19^th December, 1990.

History

The “Treaty of Nanking” of 1842, which brought an end to first opium war, resulted in the formation of “International Settlements” (foreign concession areas) in Shanghai.

This and subsequent agreements between the Chinese and foreign governments were critical for the development of foreign trade in China and of the foreign community in Shanghai.

Afterward, in 1860s, a market for securities trading commenced in Shanghai. The first shares list emerged in June 1866 and by then Shanghai’s International Settlement had developed the conditions favorable to the existence of a share market such as creation of several banks, a setting up of legal framework for joint-stock companies, and an interest in diversification among the established trading houses (even though the trading houses themselves existed as partnerships).

In 1891, while mining shares had a boom time, foreign businessmen founded the “Shanghai Share- brokers’ Association” headquartered in Shanghai as China’s first stock exchange.

Then in 1904 the Association applied for registration in Hong Kong under the provision of the Companies regulation and was renamed as the “Shanghai Stock Exchange”.

During this period, local companies mainly supplied the securities. While banks dominated private shares initially, by 1880 only the Hong Kong and Shanghai local banks remained.

By 1920 and 1921, “Shanghai Securities & Commodities Exchange” and “Shanghai Chinese Merchant Exchange” began their operations respectively. In 1929, it eventually resulted in an amalgamation. The combined market operated thereafter was called as “Shanghai Stock Exchange”.

While shares related to shipping, insurance, and docks sectors persisted in the market until 1940,  industrial shares overshadowed these shares after the Treaty of Shimonoseki of 1895, which allowed  Japan, and by extension other nations which had treaties with China, to set up factories in Shanghai and other treaty ports.

Rubber plantations boomed in the second decade of the 20^th century and consequently stock prices also rose sharply.

Later in 1930s, Shanghai had developed as the financial center of the Far East, where both Chinese and foreign investors could trade stocks, debentures, government bonds, and futures.

However, the operation of Shanghai Stock Exchange suddenly stopped after Japanese troops occupied the Shanghai International Settlement on December 8, 1941. Then in 1946, Shanghai Stock Exchange recommenced its operations before shutting down again 3 years later in 1949, after the Communist revolution intensified.

Following the end of the Cultural Revolution and Deng Xiaoping’s subsequent rise to power, China was re-opened to the outside world in 1978.

During the period of 1980s, China’s securities market developed in tandem with the country’s economic reform along with the expansion of socialist market economy. As a result, on 26 November 1990, Shanghai Stock Exchange was re-established and operations commenced a few weeks later on 19 December.

Chronology

• 1866 – The first share listing emerged in June.
• 1871 – Speculative bubble burst caused by monetary panic.
• 1883 – Credit crisis created speculation in Chinese companies.
• 1890 – Bank crisis surfaced in Hong Kong.
• 1891 – The formation of “Shanghai Share-brokers Association”.
• 1895 – Treaty of Shimonoseki opened up the Chinese market to foreign investors.
• 1904 – “Shanghai Share brokers Association named to “Shanghai Stock Exchange”.
• 1909-1910 – Rubber boom in China
• 1911 – Communist Revolution and the handing over of the Qing Dynasty. Founding of the Republic of China.
• 1914 – Market shut down for a few months due to the Great War (World War I).
• 1919 – Widespread Speculation in cotton shares.
• 1925 – Second rubber boom in China.
• 1929 – “Shanghai Securities & Commodities Exchange” and “Shanghai Chinese Merchant Exchange” amalgamated into the existing Shanghai Stock Exchange.
• 1931 – Invasion of Japanese forces into northern China.
• 1930s – Rubber share price movements dominated the stock market investing.
• 1941 – The market shut down on Friday 5 December. Japanese troops took control of Shanghai.
• 1946-1949 – Temporary recommencement of the Shanghai Stock Exchange until the communist revolution. Establishment of the People’s Republic of China in 1949.
• 1978 – Deng Xiaoping became as the influential figure in China’s leadership, thereby beginning a period of ‘opening up’ to the rest of the world.
• 1981 – Trading in treasury bonds was restarted.
• 1984 – Company stocks and corporate bonds started to appear in Shanghai and a few other cities.
• 1990 – The current Shanghai Stock Exchange re-opened on November 26 and re-commenced operation on December 19.
• 2001-2005 – A four-year market slump which resulted in Shanghai’s market value being halved, after touching its peak in 2001. A ban on new IPOs was announced in April 2005 to control the slump and allow more than US$200 billion of generally state-owned equity to be converted to tradable shares.
• 2006 – The SSE restarted full operations as the yearlong ban on IPOs was lifted in May. The world’s second largest (US$21.9 billion) IPO by the Industrial and Commercial Bank of China (ICBC) was launched in both Shanghai and Hong Kong stock markets.
• 2007-2008 – This was bullish phase.  Speculative traders rushed into the market, making China’s stock exchange temporarily the world’s second largest in terms of turnover.  After touching  an all-time high of 6,124.044 points on October 16, 2007,  the benchmark Shanghai Composite Index closed down 65% lower- (a record to-date),  mainly due to the impact of the global economic crisis which surfaced in mid-2008.
• 2010 – Agricultural Bank of China successfully completed the world’s largest IPO to date worth US$22.1 billion.

The Structure of Shanghai Stock Exchange

The securities listed on the SSE comprise of three main classes: stocks, bonds, and funds. Bonds traded on SSE consist of treasury bonds (T-bond), corporate bonds, and convertible corporate bonds. SSE T-bond market is the most dynamic of all securities markets in China. There are two kinds of stocks being issued in the Shanghai Stock Exchange: “A” shares and “B” shares.  While “A shares” are priced in the local renminbi (Yuan) currency, “B shares” are priced in U.S. dollars. Earlier, trading in A shares was only permissible to domestic investors while B shares were available to both domestic (since 2001) and foreign investors.

However, following the implementation of 2002 financial market reforms in China, foreign investors are now permitted (with limitations) to trade in A shares under the Qualified Foreign Institutional Investor (QFII) program which was officially launched in 2003.

At present, a total of 98 foreign institutional investors have been endorsed to buy and sell A shares under the QFII program.  The maximum amount allowed (quota) under the QFII program is currently US$30 billion. Authorities are now planning to merge these two types of shares in the future

The SSE operates from Monday to Friday. The morning session starts with centralized competitive pricing from 09:15 to 09:25, and continues with successive bidding from 09:30 to 11:30. This is followed by the afternoon consecutive bidding session, which begins from 13:00 to 15:00. The market is closed on Saturday and Sunday and other public holidays announced by the SSE.

Market Performance

By February 2008, 861 companies were listed on the SSE and the total market capitalization of SSE stood at RMB 23,340.9 billion (US$3,241.8 billion; US$1 = RMB 6.82).

Trading Summary for 2007

 SSE Composite

The SSE Composite (also called as Shanghai Composite) Index is the most frequently used indicator to reflect SSE’s market performance together with overall economic outlook. Components for the SSE Composite Index are all listed stocks (A shares and B shares) at the Shanghai Stock Exchange. While the Base Day for the SSE Composite Index is December 19, 1990, The Base Period is the combined market capitalization of all stocks of that day. The Base Value is 100. The index was started on July 15, 1991. BY the end of 2006, the index reached at 2,675.47. Other significant indexes used in the Shanghai Stock Exchanges include the SSE 50 Index and SSE 180 Index.

SSE’s Top 10 Largest Stocks

Source: Shanghai Stock Exchange (market values in RMB/Chinese Yuan).

Data arranged by market value as on 19 March 2008

1. PetroChina (3,656.20 billion)
2. Industrial and Commercial Bank of China (1,417.93 billion)
3. Sinopec(961.42 billion)
4. Bank of China (894.42 billion)
5. China Shenhua Energy Company (824.22 billion)
6. China Life (667.39 billion)
7. China Merchants Bank (352.74 billion)
8. Ping An Insurance (272.53 billion)
9. Bank of Communications(269.41 billion)
10. China Pacific Insurance(256.64 billion)

Listing Requirements

According to the regulations of Securities Law of the People’s Republic of China and Company Law of the People’s Republic of China, limited companies applying for stock market listing, must comply with following criteria:

• The shares are issued publicly after receiving the approval of the State Council Securities Management Department.
• The company’s total share capital must be at least RMB 30 million.
• The company must have been conducting business for more than 3 years and have posted profits over the last three successive years. This condition is also applicable to former state-owned enterprises reincorporating as private or public enterprises. In the case of previous state-owned enterprises re-established according to the regulation or founded after implementation of the law and if their issuers are big and medium state owned enterprises, it can be calculated consecutively. The number of shareholders with holdings of values getting over RMB 1,000 must not be less than 1,000 persons. Publicly offered shares must be in excess of 25% of the company’s total share capital. For company whose total share capital more than RMB 400 million, the ratio is of publicly offered shares must be in excess of 15%.
• The company must not have been involved in any major unlawful activities or false accounting records in the last three years.

Other conditions set by the State Council.

• China at present has a preference for only domestic firms to list onto their stock exchanges; India has similar rules. However, China was considering opening up its capital markets to foreign firms in 2010, but until 2012 it didn’t materialize.

The requirements for applications for the listing of shares by limited companies dealing in high and new technology are set out separately by the State Council.