Stop Relying Only on the Shanghai Composite: How the Shenzhen Component and ChiNext Indices Reveal New A-Share Opportunities

Image Source: pexels

Many investors are used to judging the entire A-share market by the rise or fall of the Shanghai Composite Index. This approach is like using the temperature of one city to judge the climate of an entire country — it has long been inaccurate.

In the context of China’s great economic transformation, a single A-share index can no longer fully represent the whole market. The combination of the Shenzhen Component Index and ChiNext Index can better reveal China’s new economic momentum and future investment opportunities.

Understanding the characteristics of different indices is the first step to discovering new opportunities.

Key Takeaways

• The Shanghai Composite mainly reflects the traditional economy and cannot fully represent the A-share market.
• The Shenzhen Component Index represents China’s economic transformation and helps investors discover growing companies.
• The ChiNext Index is a hallmark of the innovation economy and helps investors understand trends in emerging industries.
• Investors should combine these three indices together to gain a comprehensive view of the A-share market.
• Investors can easily track these indices using exchange-traded funds (ETFs).

Decoding the Shanghai Composite: The “Ballast Stone” of the Traditional Economy

The Shanghai Composite Index, officially the Shanghai Stock Exchange Composite Index, has long been regarded as the barometer of China’s stock market. However, it is more like the “ballast stone” of China’s traditional economy — it has stability in abundance but is insufficient in reflecting the new economy. To understand this bias, we need to look at its constituents and compilation method.

Constituents: Overweight in Finance and Energy

The most striking feature of the Shanghai Composite is the extremely high weighting of financial and energy sectors.

• Financial Giants: Banks, insurance companies, and securities firms occupy a considerable portion of the index.
• Energy State-Owned Enterprises: Oil and coal giants represented by “the two barrels of oil” are also pillars of the index.

These companies are huge in size and market capitalization. Even small movements in their prices have a massive impact on the entire index. This leads to a common phenomenon:

Even if hundreds or thousands of stocks representing emerging industries rise broadly, as long as a few financial or energy heavyweights fall, the Shanghai Composite can still close in the red. This often causes the index movement to disconnect from the actual profit-and-loss experience of most investors.

Compilation Method: Inherent Limitations in Representativeness

The compilation method of the Shanghai Composite also determines its limitations in representativeness. It is a composite index that includes all stocks listed on the Shanghai Stock Exchange main board. This “large and comprehensive” model brings two problems:

1. Incomplete Market Coverage: It does not include stocks on the Shenzhen Stock Exchange, nor does it include companies on the Science and Technology Innovation Board (STAR Market) that represent China’s technological innovation strength. This means the most dynamic part of the Chinese economy is not covered by this A-share index.
2. Weighting Method Amplifies Influence: The index uses total share capital weighting, which further magnifies the influence of large-cap companies. This makes the index direction firmly controlled by a few “behemoths” and difficult to reflect the growth vitality of the vast number of small and medium-sized enterprises.

Therefore, using the Shanghai Composite as a reference for observing the macroeconomic base is appropriate, but if you want to capture structural opportunities, you must look elsewhere.

Examining the Shenzhen Component Index: The “Main Force” of Economic Transformation

Image Source: pexels

If the Shanghai Composite is a rear-view mirror for observing China’s economic fundamentals, the Shenzhen Component Index is more like a dashboard reflecting structural changes in the economy. It provides investors with a unique perspective to understand the “main force” of China’s economic transformation.

Constituents: High-Tech Manufacturing and Consumer Leaders

Unlike the Shanghai Composite’s heavy weighting in finance and energy, the Shenzhen Component Index’s composition better reflects the vitality and future direction of the Chinese economy. It selects 500 companies with larger scale and better liquidity from those listed on the Shenzhen Stock Exchange.

The Shenzhen Stock Exchange itself focuses more on innovation and technology, and its listing rules are friendlier to growth companies. This makes the constituents of the Shenzhen Component Index naturally cover more industries that represent the future:

• High-Tech Manufacturing: For example, industrial automation, precision instruments, and other representatives of manufacturing upgrades.
• Information Technology: Covering core areas of the digital economy such as software and communication equipment.
• Healthcare: Including biotechnology, medical devices, and other promising fields.
• Consumer Staples & Discretionary: Gathering many consumer brand leaders that meet China’s huge domestic demand.

Therefore, the Shenzhen Component Index is like a window. Through it, investors can clearly see China’s solid steps in transforming from traditional heavy industry to high-tech and consumption-driven growth.

Investment Opportunities: Discovering Mid-Cap Growth Stocks

The unique composition of the Shenzhen Component Index makes it an excellent tool for discovering “mid-cap growth stocks.” These companies are neither as risky as startups nor as slow-growing as mega-caps — they are in the golden stage of rapid growth.

Investors can identify investment opportunities by observing the Shenzhen Component Index. For example, paying attention to sectors whose weight in the index continues to rise or that lead gains in certain periods can often help identify industries in an upcycle. Because the sectors served by the Shenzhen Component Index (such as green energy and biotechnology) have faster business cycles, the volatility of this A-share index is also relatively higher, but this also means more structural opportunities. For investors hoping to capture the dividends of China’s economic transformation, the Shenzhen Component Index is an indispensable research object.

Focusing on the ChiNext Index: The “Vane” of the Innovation Economy

Image Source: pexels

If the Shenzhen Component Index is a dashboard, the ChiNext Index is an even more sensitive radar. It is specifically used to detect the cutting-edge dynamics of China’s innovation economy and is a true “vane.”

Constituents: The Vanguard of “Three Innovations and Four News”

The ChiNext Index consists of the 100 largest and most liquid companies on the Shenzhen ChiNext Market. These companies are outstanding representatives of China’s “Three Innovations and Four News” strategy (innovation, creation, entrepreneurship; new technology, new industry, new business format, new model).

Its constituents are highly concentrate on strategic emerging industries that determine the future:

• Information Technology: Innovative companies in artificial intelligence, cloud computing, etc.
• High-End Pharmaceuticals: Medical companies focusing on innovative drugs and biotechnology.
• New Energy: Covering core links in the green energy industry chain such as photovoltaics and lithium batteries.

These companies generally feature high investment and high R&D. The sectors representing China’s technological frontier have R&D spending as a percentage of revenue far exceeding traditional industry-dominated composite indices — this is the financial guarantee of their innovation vitality.

Trend Judgment: Grasping the Prosperity of Emerging Industries

One of the most notable characteristics of the ChiNext Index is its large volatility. For investors who do not understand its positioning, this seems very risky. But for keen observers, this volatility itself is valuable information.

The sharp ups and downs of the ChiNext Index directly reflect the market’s investment sentiment and prosperity judgment toward high-risk, high-return emerging industries. It acts like an amplifier, quickly and clearly reflecting policy benefits, technological breakthroughs, or industry bottlenecks in the index movement.

Therefore, investors can use this A-share index to judge the temperature of specific tracks. When the index continues to strengthen, it usually means the relevant emerging industries are in an upcycle and market confidence is sufficient. Conversely, it may signal that the industry is facing adjustment. For investors hoping to capture technology growth trends, the ChiNext Index is an indispensable decision-making reference tool.

The Positioning of the Three Major A-Share Indices: How to Combine and Apply Them?

After understanding the respective characteristics of the Shanghai Composite, Shenzhen Component, and ChiNext indices, a more important question faces investors: How to combine them to form a more comprehensive and three-dimensional market observation system? Observing any single A-share index alone may lead to misjudgment, but combining the three can build your own “A-share panoramic radar.”

Role Division: Stabilizer, Main Force, and Probe

To combine and apply these three major indices, you must first clarify their irreplaceable roles. We can use a vivid metaphor to understand their division of labor:

• Shanghai Composite: The “Stabilizer” of the Macro Economy It represents China’s economic fundamentals, especially traditional finance and energy industries. Its trend reflects the overall stability of the macroeconomy. This is similar to the Dow Jones Industrial Average in the U.S. market, mainly composed of mature blue-chip companies and serving as a basic indicator for observing economic health.
• Shenzhen Component Index: The “Main Force” of Economic Transformation It focuses on high-tech manufacturing and consumption fields and is the core force of China’s economic structural transformation and industrial upgrading. Observing it lets you understand the growth dynamics of the backbone forces in the economy. It captures a wider range of growth companies than the Shanghai Composite.
• ChiNext Index: The “Probe” of the Innovation Economy It focuses on the most dynamic strategic emerging industries and is a high-precision tool for predicting future technology trends and market sentiment. This is comparable to the Nasdaq Composite Index in the U.S. market — a vane for technology and innovation. Its volatility often foreshadows prosperity changes in emerging tracks.

By combining the three, investors have a complete observation system: use the “stabilizer” to judge whether the overall environment is stable, use the “main force” to find structural growth opportunities, and use the “probe” to capture future breakout points.

Investment Strategy: Build Your Panoramic Radar

After clarifying the role division, investors can start building their own investment strategies. This does not require investing in all indices at the same time, but learning how to interpret the combined signals they send.

1. Simplify Tracking with Exchange-Traded Funds (ETFs)

For ordinary investors, directly analyzing hundreds or thousands of constituent stocks is unrealistic. At this point, exchange-traded funds (ETFs) become highly efficient tools. By holding ETFs that track specific indices, investors can easily participate in the overall performance of the corresponding market.

In addition, related products are also available in international markets, such as the VanEck ChiNext ETF (CNXT) listed in the U.S., providing global investors with a window to observe China’s innovation economy. Investors can conveniently manage funds and allocate global assets through digital financial service platforms such as Biyapay.

2. Combine Technical Indicators to Judge Trends

When observing indices in combination, you can introduce some simple and effective technical indicators, such as moving averages, to assist in judging market trends.

• Long-Term Trend Judgment: The 200-day moving average is often regarded as the dividing line between long-term bull and bear markets. When the index price continues to run above the 200-day line, it usually means the market is in a long-term uptrend.
• Medium-Term Trend Identification: Investors can adopt a dual moving average strategy, such as observing the crossover of the 20-day and 50-day lines. When the short-term moving average (such as the 20-day line) breaks upward through the long-term moving average (such as the 50-day line), it forms a “golden cross,” which is usually regarded as a positive signal. Conversely, it forms a “death cross,” indicating adjustment risk.

For example, an investor can apply it this way: He observes that the Shanghai Composite has stabilized above the 200-day line, confirming the long-term bottom area of the market. At the same time, he finds that the ChiNext Index’s 20-day line has broken upward through the 50-day line, indicating that the short-term momentum of the technology growth sector is strengthening. This combined signal is much more reliable than looking at any single indicator alone.

3. Develop Differentiated Observation Strategies

Finally, investors should establish differentiated observation models based on their own risk preferences.

• Conservative Investors: Can use the Shanghai Composite as the observation benchmark for the market “water level” to ensure the overall environment is stable. At the same time, focus on sector rotation opportunities in the Shenzhen Component Index, such as consumption and medicine, to seek steady growth.
• Aggressive Investors: Can take the ChiNext Index as the core observation object, using its high volatility to judge the prosperity cycle of emerging industries. When the ChiNext Index shows a clear upward signal, actively explore the leading sub-tracks, such as new energy or artificial intelligence.

In short, stop deifying or isolating any single index. Only by organically combining these three major indices can investors truly read the multi-dimensional signals of the market, build their own panoramic radar, and discover new opportunities in the complex A-share market that are overlooked by traditional perspectives.

Investors should view the three major indices as a whole. The Shanghai Composite is the stabilizer for observing the macroeconomy, the Shenzhen Component Index is the main force for insight into industrial upgrading, and the ChiNext Index is the high-precision probe for predicting emerging trends.

Investors should establish a dynamic observation system. Conservative investors can focus on sector rotation in the Shenzhen Component Index, while aggressive investors can use the ChiNext Index to judge track prosperity.

True investment wisdom lies in understanding changes in market structure. Only when investors stop looking at indices in isolation can they more comprehensively understand China’s A-shares and discover new opportunities overlooked by traditional perspectives.

FAQ

Which index is the best?

There is no “best” index, only the one most suitable for your observation goal. The Shanghai Composite reflects the macroeconomy, the Shenzhen Component observes industrial transformation, and the ChiNext predicts technological innovation. Investors need to combine them to form a comprehensive market perspective.

Why does the Shanghai Composite fall while my stocks rise?

The Shanghai Composite is heavily influenced by a few large financial and energy stocks. When these heavyweights fall, the index can close red. At this time, many small and medium-cap stocks representing the new economy may be rising. The investor’s personal experience depends on their holding structure.

Which index should beginners start with?

Beginners can start with the Shenzhen Component Index. It covers a wide range of industries with relatively moderate volatility and is an excellent window for understanding structural changes in the Chinese economy. Then gradually combine the Shanghai Composite and ChiNext Index for comprehensive judgment.

What are the volatility differences among the three major indices?

Generally speaking, volatility from high to low is: ChiNext Index > Shenzhen Component Index > Shanghai Composite Index. The ChiNext Index constituents are mostly high-growth, high-risk emerging industry companies, so volatility is the largest. The Shanghai Composite has the smallest volatility due to its stable heavyweights.