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What is the China A50? | AvaTrade Tutorial
What is the China A50 Index?
The China A50 is an index for 50 stocks of companies with the highest market capitalisation listed on the Shanghai and Shenzhen stock exchanges. China A50 was introduced by FTSE Russell to track the performance of A-listed company shares as well as to offer a definitive benchmark for equity investment in Mainland China.
The index popularity has coincided with increased demand for Chinese investments as the country moved from being an emerging markets country only a few decades ago, to now becoming a global economic giant.
A-shares constitute companies which are listed on the Shanghai and Shenzhen stock exchanges, and they are denominated using the local Chinese currency renminbi (RMB). For investors, A-shares represent the best stocks available in China as a result of a rigorous enlisting procedure as well as a diverse sector representation.
FTSE Russell has also introduced various other indices in other global equity markets such as the BRIC 50, Blossom Japan, ASFA Australia, and ASEA Pan Africa, USA2000.
China A50 trended sideways at the turn of the century, making a trough at circa 3670 in January 2005. It then turned higher strongly as the Chinese economy posted supernormal growth and managed to print an all-time high of circa 23,160 in January 2007.
The subsequent global financial crisis weighed down on the index, which tumbled to a low of circa 6070 by January 2008. A mild recovery would follow, pushing the index to above 13,000 by January 2009. Since then, the index has maintained a sideways trajectory, and as of November 2019, it was trading at just below 14,000.
Index Composition and Calculation
China A50 is a free float, capitalisation-weighted index. Market capitalisation determines inclusion in the index, and free float means that the calculation involves only outstanding shares available to the public. This ensures that the overall price of the index accurately represents the true opportunity available to an investor.
To be included in the index, a company must meet the conditions below:
- Its float-adjusted market capitalisation must be among the top 50 companies in China
- It must have a free float of more than 5%
- It must be sufficiently liquid. It must have a daily median trading volume of at least 0.04% of its shares every month for the last 8 months.
FTSE Russell rebalances the index quarterly in March, June, September and December to ensure it continuously reflects the equity performance in China.
The index is calculated to 12 decimal places, but for easier trading and investment purposes, it is published with 2 decimal places. FTSE Russell uses actual trade prices for securities with local stock exchanges and applies forex rates supplied by Reuters in real-time.
Here are the top 5 sectors represented in the China A50:
|Banks||44%||China’s banking sector is the largest in the world|
|Life Insurance||13%||Life insurance has seen exponential in China since 2008|
|Consumer Goods||12%||China’s demographics and long-term economics make it an eternal huge consumer goods market|
|Industrials||11%||Industrial activities contribute 40% to the Chinese GDP|
|Financial Services||11%||Investment and other speciality finance services have benefitted from a more conducive business environment in China|
There are a few other derivatives based on the China A50 index such as the Singapore China A50 futures. FTSE has also launched other indices for the Chinese equity markets such as China All Means, China A200, China A400, China A600, FTSE China B Share All Cap, FTSE China (HK Listed), FTSE Greater China All Cap, FTSE China A Innovative Enterprises, and FTSE China Overseas All Cap.
Factors Influencing the Overall Index Price of the China A50
Its wide sectorial composition ensures that multiple factors can influence the overall price of the China A50 index. A significant change in the price of a major constituent, such as Ping An Insurance or China Minsheng Bank, will have an impact on the overall price of the index. As well, a change in any big sector, such as Financials, will also impact heavily on the index’s price.
Major events that shake stock markets will also impact on the benchmark stock index. This was evident during the 2008 global financial crisis when the index tumbled by more than 50%. The back and forth trade talks between the US and China in 2019 also limited any growth on the index for a couple of months.
The Chinese monetary environment will also have an impact on the index. The Bank of China (Chinese Central Bank) has never shied away from using its rich policy toolkit to control the economy in the form of changing interest rates or bank reserve requirement ratios. Lower rates, for instance, will always excite the stock market and inspire higher prices for the China A50 index.
Why Trade the China A50 Index?
- Liquidity –
The China A50 index represents the biggest companies in China, which makes it a highly liquid asset due to the amount of activity taking place in individual stocks.
- Fewer price shocks –
There is smooth price action in the China A50 index because the computation method ensures no single stock can significantly impact on the overall price of the index. As a result, there is also no risk of big price gaps.
- Diversification –
The China A50 index offers immense sectorial diversification to investors. The sectors available include financials, automobiles and industrials.
- Vast news coverage –
There is massive news coverage of the China A50 index, which is the foremost equity index in the Asian giant. This makes both fundamental and technical analysis a lot easier.
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China a50 main FAQs
- Who created the China A50 index?
The China A50 was created by the FTSE group as a way to measure the performance of the top 50 company stocks listed on the Shanghai Stock Exchange and the Shenzhen Stock Exchange. The “A” designation is added because only the stocks which are domestically issued A shares are included in the index. The B shares that are issued for foreigner trading are not included. Some similar indices are the Dow Jones China 88 Index created by S&P Dow Jones Indices, and the CSI 100 and CSI 300 created by China Securities Index Company.
- What is the weighting of the China A50 index?
The heaviest weighting in the China A50 index comes from banks and financial companies. The most heavily weighted company is Ping An insurance at 9.13%. In all, 13 of the 50 component companies in the index are banks, and their total weighting in the index is 43.7%. In addition, life insurance, investment services and financial companies make up an additional 25.3% weighting, giving the banks and financial services stocks a weighting of 69%. Because of this the China A50 is a very balanced index, but it does give a good reading on the strength and weakness of China’s financial sector.
- What is the benefit of trading the China A50 index?
The China A50 index is made up exclusively of ‘A’ listed stocks. These are the more than 2,000 Chinese stocks listed on the Shanghai Stock Exchange or the Shenzhen Stock Exchange and unavailable for foreigners to trade. That’s right, only Chinese nationals have access to trade these stocks. However, by trading a CFD on the China A50 index anyone is able to benefit from the movements in the domestic Chinese share market. Not only can traders make a long bet on the market with CFDs, but they can also make a short bet, which makes CFDs a very flexible way to speculate on the China A50.