SCI sees gains after methodology revamp

The Shanghai Composite Index, the barometer of the A-share market, notched up gains on Wednesday after the first major reconstitution of the index since its debut three decades ago took effect.

Analysts said the much-anticipated revision will make the SCI less volatile and more effective in reflecting the market performance of Shanghai-listed firms, as part of the nation's ongoing efforts to spur a healthy development of the equity market.

On Wednesday, the Shanghai Stock Exchange and China Securities Index Co Ltd implemented the first major revision of the SCI compilation methodology since it was launched in 1991. The index rose by 0.37 percent to close at 3333.16 points after hitting an intraday high of 1.84 percent, led by the tourism and energy sectors.

The SCI compilation methodology had started becoming outdated due to its weakening ability to gauge market performance and reflect China's economic development. A common complaint has been that though China's GDP grew by at least 6.1 percent on a yearly basis in the last decade, the SCI, which should have been the barometer of the Chinese economy, remained at more or less the same level it was at a decade ago by the end of last year of slightly above 3000 points.

The revision has excluded shares under special treatment due to major risks in fundamentals from the index, extended the time it takes for new listings to be included, and incorporated the securities listed on the science and technology innovation board, or the STAR board, according to the Shanghai bourse.

Taking both domestic market conditions and international practices into consideration, the reconstitution aims to make the index more representative and stable, providing a better gauge for investors to evaluate market performance and carry out wealth management, an SSE statement said.

"The new compilation scheme will help the SCI to more accurately and steadily reflect the overall condition of Shanghai-listed firms," said Fan Lei, chief macroeconomic analyst with Sealand Securities.

The new scheme will prevent the index from being exposed to the high volatility of a tiny number of securities and improve the stability of the index while being the representative of the whole market, said Fan.

This is because both shares under special treatment and newly-listed stocks are much more volatile than a typical stock and cannot represent the mainstream performance of listed firms, according to Fan.

The new scheme has postponed the inclusion of new stocks, except those ranked in the top 10 in terms of capitalization on the Shanghai bourse, from their 11th trading session to a year after getting listed.

On the other hand, the incorporation of STAR-listed tech-focused securities is a timely move to help the index better reflect the structural changes of the market, as the one-year-old STAR Market has developed into an important part of the Shanghai bourse with stable operations, said Fan.

With more high-tech firms included in the index and those with major fundamental risks excluded, analysts expect the long-term profitability of the SCI to increase and be more in line with the growth of the Chinese economy.

The improvement in the profitability of the SCI, the mostly-watched market benchmark, will help attract more funds into the market and cement investor confidence, said Wang Haoyu, managing director of Beijing-based CreditEase Wealth Management.

Analysts, however, noted that the new methodology has retained the practice that the weighting of stocks is determined based on their total capitalization, instead of free-float market value, making the index's overweighting in traditional sectors such as banks linger.