Stock indexes seek to attract long-term capital

The indexes recently introduced at the Shanghai Stock Exchange mark another step forward for China in indexing investment, and address the central regulator's call to nurture long-term investment, said experts and market mavens.

On Tuesday, the SSE launched the China Ocean Economy Stock Price Index, the first of its kind in the country, aiming to make it a timely reflector of the development of China's ocean economy from the capital market's perspective and direct more financial resources to ocean-related sectors.

The new index covers 213 ocean-related companies listed on the stock exchanges in Shanghai, Shenzhen, Beijing and Hong Kong. With the base date set at Dec 31, 2012, the annualized return of the index is estimated at around 7.5 percent as of Monday, according to the SSE.

On July 15, the SSE and China Securities Index Co Ltd announced they will launch the SSE Composite Total Return Index on Monday. All the stocks and Chinese Depository Receipts issued by red-chip companies listed on the SSE will be constituents of the new index.

It should be noted that companies' dividend payments have been included in the composition of the SSE Composite Total Return Index to give a broader picture of the companies' actual operation, said SSE officials.

According to the SSE, indexing investment has been embracing "strategic opportunities" thanks to supportive policies and investors' rising interest.

The nine-part guideline aiming to promote high-quality development of the Chinese capital market, which was rolled out by the State Council, China's Cabinet, in April, said that indexing investment should be promoted as part of the efforts to attract more long-term capital to the market and expand the group of long-term investors.

The size of SSE and CSI index fund products has reached a record high of 2.4 trillion yuan ($329 billion) by the end of May. While there were only 10 index fund products in 2005, the number had surged to over 2,000 by the end of 2023. Up to 570 billion yuan flowed into index fund products last year, according to SSE data.

The upward momentum continued this year. As of the end of May, the total size of Chinese onshore index fund products reached 3.4 trillion yuan, up more than 17 percent from the level at the end of 2023. Over 360 billion yuan has flown into these index fund products over the first five months of this year.

The returns of index-based products have been eye-catching over the past few years when market volatility was more drastic globally due to various complexities and uncertainties.

In 2023, the excess returns of the CSI Passive Equity Fund Index reached 3.7 percent. But active funds, which choose specific stocks, reported an average loss of 11.83 percent last year, according to market tracker Wind Info.

The size of passive funds, which track indexes, continues to expand in China. While passive funds held about 1.99 trillion yuan worth of A-shares by the end of March, the figure topped 2 trillion yuan in the second quarter, according to Industrial Securities.

Wu Xinkun, chief strategist of Haitong Securities, explained that passive funds accounted for more than one-third of all the stock-focused mutual fund products in China by the end of 2023, hitting a record high. This is a clear signal that China's equity funds are undergoing the transition toward passive management, he said.

A reference point is the market trend in the United States where passive funds accounted for only 20 percent of all the U.S. mutual funds in 2012, but the figure rose to 50 percent at the end of 2022, said Wu.

Capital started to flow out of active funds into passive funds in 2008 when the U.S. stock market plunged as the latter offered better returns and lower fees. Meanwhile, most U.S. active funds showed neither advantages in creating excess returns over the past decade nor better defensive functions during the previous rounds of market slump. Investors' preference for them has thus declined, he said.

Amid the improving effectiveness of the Chinese market and the continued inflow of more long-term capital, including social security capital and insurance capital, indexing investment will be more widely accepted by Chinese investors, said market experts.