The new Shanghai Composite Index closed 1 percent higher on its first day of use yesterday, a sign of high expectations among investors for a stock market that is currently undergoing reforms.

The index opened at a base of 1,000 points, before initially sinking to 992.91 half an hour later. It then rebounded, rising to 1,009.57 at the close.

The index is composed of G shares, shares of domestically listed companies that have gone through the government's share reform process.

Meanwhile, the older Shanghai Composite Index closed at 1180.96 points, a 1.71 percent gain over its last trading day in 2005. Stocks from the aviation industry registered the highest increases, which analysts say anticipates the industry's imminent share reforms.

"It is normal for market makers to buy stocks of companies that are about to launch their reform programmes," said Wang Haitao, a stock analyst with Shenyin & Wanguo Securities.

The old index tracks both yuan-dominated A shares and foreign currency B shares and is widely regarded as the benchmark for monitoring China's stock market.

"With the formal launch of the new index, we can see the day when the old one will be replaced," said Hu Ruyin, from the Shanghai Stock Exchange's research bureau.

Two G shares were among the top 20 gainers of the day. Shanghai Jinling Co Ltd and Jiangsu Changjiang Electronics Technology Co Ltd both climbed by over 6 percent, with turnover of 79 million yuan (US$9.7 million) and 25 million yuan (US$3 million) respectively.

The new index is made up of 100 Shanghai-listed G shares. As of December 15 last year, total market capitalization of all G-share companies was 392.7 billion yuan (US$48.4 billion), accounting for 18 percent of the Shanghai market.

The free-float market capitalization was 142.5 billion (US$17.6 billion), accounting for 22 percent of the local free-float market. Free-float market capitalization measures the proportion of total shares issued by the company that are available for trading.

From yesterday, new G shares will be added to the new index on their second trading day, according to a circular released by the Shanghai Stock Exchange.

Despite the cheerful performance on its first trading day, analysts are cautious about the index's future performance.

To monitor the performance of G-shares, Shenyin & Wanguo Securities introduced its own G-share index in August last year, three months after the share reform process started. The index recently hovered at around 900, a 10 percent drop from its base of 1,000 points.

"It reflects lack of confidence on the part of investors as sound corporate governance usually takes five to ten years to build up," Wang Haitao told China Daily.

China's stock market finished its fourth consecutive bear year on December 31, 2005 when the old Shanghai Composite Index closed at 1161.06 points.

Daily turnover of A and B-shares on the local bourse declined to an average of 8 billion yuan (US$1 billion) at the end of 2005, down more than a quarter from the previous year.

Much of the decline has been attributed to problems surrounding state-held shares.

In a bid to boost the market, the government suspended IPOs on both the Shanghai and Shenzhen bourses last May and ordered listed companies to float their state-owned shares in orderly batches.

These shares were previously non-tradable.

(China Daily January 5, 2006)