Viewing the History of China A-Shares Through the Lens of the Dow Jones China 88 Index

The Dow Jones China 88 Index has recorded the ups and downs of the large-cap mainland China market for more than 20 years. Launched in 1996, the index was one of the first large-cap A-share benchmarks available in the market and therefore is unique in the length of its live, consistent track record. Let’s revisit some of the recent history of the China A-shares market through the lens of the Dow Jones China 88 Index.

Volatile History

After returning an average 6% each year (through ups and downs) for the first 10 years of existence, the Dow Jones China 88 Index subsequently experienced its most precipitous surge to date, increasing over 500% in the 15 months from June 2006 to October 2007. The unprecedented highs were soon followed by a 72% decline over the next year. A subsequent 120% appreciation soon changed the index’s course, leading to a relatively drawn-out period of general underperformance, falling 50% over slightly more than 3.5 years. From the beginning of its current rally starting in January 2016, the index has returned nearly 45% as of Dec. 15, 2017.

Perhaps the overall growth in market cap is more telling than the volatility in returns, however. In just over 21 years, the index market cap has grown significantly from approximately USD 60 billion to USD 7.3 trillion, earning China’s stock market the rank of second largest in the world—behind only the U.S.

The Dow Jones China 88 Index – Basics

The Dow Jones China 88 Index is a blue-chip index designed for use as the basis of financial products, representing the largest and most liquid stocks traded on the Shanghai and Shenzhen stock exchanges. The selection universe consists of all companies whose Class A shares have been included in the Dow Jones China BMI, which covers approximately 95% of the float-adjusted market capitalization listed on the Shanghai and Shenzhen stock exchanges. The largest 88 stocks are included in the index, which is float adjusted and weighted by market cap. The early inception date and continuous live history make it unique among China’s A-share blue-chip indices.

Similar comparison indices include the FTSE China A50 (launched in December 2003), which comprises a slightly narrower set of 50 A-shares, and the CSI 300 (launched in April 2005), which comprises a much broader set of 300 China A-shares. These well-known indices are similar in terms of correlation and returns. The 10-year correlation of the Dow Jones China 88 Index is 99% compared to the FTSE China A50 and 98% correlated to the CSI 300. Though limited by the data history of these peer indices, Exhibit 2 displays the similarities and differences in risk/return characteristics over the relevant periods. The Dow Jones China 88 Index offers similar risk/return profiles compared to these peers, while offering a much longer data history.

China’s stock market is often regarded for its past growth and opportunity for future appreciation. The Dow Jones China 88 Index is a prominent, long-standing, representative, and liquid China A-share index, allowing market participants to measure the growth prospects of this important market.

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