This article is reproduced from [Voice of China, China Central Radio and Television];
The revised Shanghai Composite Index Series Compilation Plan will be implemented starting today. The weight of a single sample will not exceed 15%. What does this mean?
As the core broad-based index of A-shares, the Shanghai Composite Index is like a “thermometer” for observing the market’s temperature. Today, the compilation plan of the Shanghai Composite Composite Index series has undergone fine-tuning and optimization.
The main contents of this revision include two aspects:
The first is to increase the weight upper limit rule that the weight of a single sample does not exceed 15%;
On the other hand, the elimination time of risk warning securities is adjusted from “the trading day next to the second Friday of the month following the risk warning implementation date” to “the trading day next to the second Friday of the month following the risk warning announcement date.” The remainder of the indexing program remains unchanged.
Why is it necessary to draw a weight red line for sample stocks in the index and move forward the elimination node of risk warning stocks? Is the rule revision a short-term adjustment, or a regular upgrade of the capital market’s basic system details?
Some ordinary investors tend to directly equate index points with market profits and losses, but ignore the index itself, which is a rigorous statistical tool. Its compilation rules determine whether we can see the true face of the market. According to the “Announcement on Revising the Compilation Plan of the SSE Series Comprehensive Index” issued by the Shanghai Stock Exchange and China Securities Index Company on September 24, there are two revisions this time. First, a new upper limit for the weight of a single sample, and the maximum weight of a stock shall not exceed 15%; second, risk warning stocks such as ST and *ST will be eliminated in advance, and the other rules remain unchanged. Tian Lihui, director of the China Capital Market Society and professor of finance at Nankai University, summarized the adjustment as adding a “limiting valve” and “filter” to the index.
Tian Lihui: The Shanghai Composite Index is the old benchmark for A-shares. With the development of the market, the market value of some large-capitalization companies may become larger and larger, while some companies are not operating well and wear the ST hat. On the one hand, by setting a weight limit, it prevents individual giant companies from “kidnapping” the entire market trend. On the other hand, by eliminating risk warning stocks in advance, sick companies can be “invited” out of the sample pool in a timely manner. This increase and decrease reflects the regulatory authorities’ determination to purify the index ecology from the underlying algorithm to ensure that the index points we see can objectively, fairly and truly reflect the overall quality and industrial changes of China’s listed companies.
Putting it into the current market, no stock has yet touched the 15% weight limit, and the stocks with the highest weight in the Shanghai Composite Index account for only about 3%. After the new regulations are implemented, the Shanghai Composite Index will not trigger position adjustments in the short term, and there will be no significant changes in index points and market patterns.
Since this red line is no longer needed, why is the supervision laid out? Think of the index as a class average. Its mission is to reflect the overall level. If a particularly large student is transferred in the future, his or her score alone can significantly raise or lower the average score, and the overall evaluation will be distorted. Put it on the A-share market. Without weight constraints, the rise and fall of a single giant is enough to stir up and down the index. The “thermometer” of the market index only measures the temperature of individual companies, rather than the true temperature of the entire market. Tian Lihui said that setting a weight limit of 15% is to build a strong institutional firewall in advance to prevent index distortion of the “one handsome man covers all the ugly” type. This is also a mature risk control method commonly used by global mainstream indexes such as Hang Seng and S&P.
This is the forward-looking regulatory wisdom of “fixing the roof on a sunny day”. In the future, A-shares will inevitably see the emergence of more technology giants with huge market capitalization. If precautions are not taken in advance, the sudden rise and fall of a super company in the future will directly determine the red or green of the market, causing the index to lose its function of macro representation. What’s even more frightening is that this may also trigger a mechanical grouping of passive funds, forming a capital siphon effect, exacerbating the market’s liquidity stratification and valuation bubbles. Demarcating the ceiling in advance is to prevent this kind of systemic distortion and protect the inherent stability of the market. If there is no weight ceiling, the market index will face the risk of distortion of “one leaf blinding the eye”.
It is worth noting that this revision simultaneously covers the Science and Technology Innovation Composite Index. The Science and Technology Innovation Composite Index is a comprehensive market index that includes most of the targets listed on the Science and Technology Innovation Board. It covers all large, medium and small-cap stocks and is calculated using a weighted calculation based on total market value. According to the compilation rules, if a new stock’s daily average total market value ranks among the top ten on the Science and Technology Innovation Board after its listing, it can be included in the Science and Technology Innovation Composite Index sample after three months of listing; other new stocks will be included in the index after one year. This means that in the future, large science and technology innovation stocks can enter the Science and Technology Innovation Composite Index relatively quickly. Without weight constraints, such large-capitalization stocks may occupy an overly high proportion in the Science and Technology Innovation Composite Index.
Tian Weidong, investment advisory director of Kaiyuan Securities, estimates that the new regulation will be reduced to 15% this time, which will act as a shock absorber for the fluctuations of individual stocks in the Science and Technology Innovation Composite Index. Avoid the phenomenon of individual stocks “kidnapping” heavyweight stocks. Calculated based on the current ratio, the excess will be allocated to the more than 600 sample stocks on the Science and Technology Innovation Board through weight factors, and the ETF will increase its position in second- and third-tier science and technology innovation stocks, which will also have some promotional effects on those stocks. At present, the total size of the Science and Technology Innovation Composite Index ETF exceeds 7 billion, spread over hundreds of stocks, and the impact is still relatively small. Generally speaking, this rule change does not change the direction of the market, nor does it change the feeling of the general trend. It almost feels relatively small to ordinary investors.
Tian Lihui believes that the new regulations mean that the Shanghai Composite Index series has established the iron law of decentralization and balance in the underlying logic: future index increases can no longer rely on one or two large companies to fight alone. This also means that passive investment funds will be forced to make a more balanced industry allocation when tracking the index, effectively avoiding the risks caused by overcrowding of funds into a single track. Looking at a deeper level, this marks that the A-share index system has officially established a dual line of defense to prevent tail risks and head monopoly.
The logic of moving forward the elimination node of risk warning stocks is equally clear. Listed companies subject to risk warnings have high operating uncertainty and concentrated risks, and remain in index samples for a long time, just like impurities mixed into a thermometer, interfering with the reading. The new regulations will advance the elimination of nodes to the month after the risk warning announcement, which is equivalent to dusting off the index sample pool in advance.
Tian Lihui pointed out: This optimization of the rhythm of ST stock elimination has accurately made up for the shortcomings of the system such as the time difference in clearing out inferior assets. Eliminating them in advance now is equivalent to opening up the chain of microscopic transmission between the delisting system and index compilation, achieving timely cleanup. On the one hand, it purifies the index sample pool and makes the index cleaner and healthier. On the other hand, it also sends clear valuation penalty signals to the market, thereby guiding market funds to accelerate the gathering of high-quality and compliant companies.
The index is just a yardstick for observing the market. Optimizing and polishing the compilation rules is a statistical tool and will not change the market fundamentals and market trends. The essence of plugging loopholes and laying the groundwork for the system in advance is to return the index to its origins, truthfully record the performance of most listed companies, and provide a more fair and reliable market benchmark for the entire market.
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