The CS series of indices is one of the broadest stock indices in China. The name "CS" stands for the China Securities (中证), which encompasses both the Shanghai Stock Exchange and the Shenzhen Stock Exchange. This series sets itself apart from other indices associated with specific boards, such as the Shanghai Composite Index, the Shenzhen Composite Index, and various smaller market indices. The CS indices pull from a large pool of all A-shares listed within China, providing a differentiated perspective on market performance.

The CSI 300 Index holds an exceptional status, and for a considerable time, it has been used as a benchmark for China's entire stock market in a multitude of analyses and price models. This index comprises the 300 largest and most liquid stocks listed on both the Shanghai and Shenzhen exchanges, distinctly leveling up by focusing on market capitalization and liquidity. Given that it encompasses a broad array of major companies, it is regarded as a flagship index reflecting the health of the Chinese market.

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Launched in 2005, the CSI 300 has consistently accounted for over 50% of the total market capitalization of China's stock market. As of mid-November 2023, the index stands at 3968.8 points, representing a collective market capitalization of approximately 56 trillion yuan, constituting 57% of the entire A-share market.

From the CSI 300, another important index, the China Securities 100 Index (CSI 100), narrows down to the 100 largest stocks again to portray the overall condition of the most influential companies in the A-share market. Following this trail of broader measures, the CSI 500 and CSI 1000 represent lower tiers, focusing on the next set of market caps but without the same concentration on the top 300 stocks.

The CSI 500 index is formed from the remaining stocks, excluding those from the CSI 300, ordered by market capitalization and liquidity. Combined, the CSI 800, which consists of the CSI 300 and CSI 500, effectively represents around 70% of the Chinese stock market’s total capitalization.

As we delve further down the market cap hierarchy, the CSI 1000 indexes the largest 1000 stocks not covered by the CSI 800, while the CSI 2000 expands further to include 2000 stocks, essentially encapsulating a larger breadth of the A-share universe. With an approximate total of 5300 stocks listed on the A-share market, the CSI 800, 1000, and 2000 cover the substantial majority of these potential investments.

Illustratively, if one were to visualize the entire A-share market as a human body: the CSI 100 represents the head, the CSI 300 covers the upper body, the CSI 500 accounts for the torso, while the CSI 1000 embodies the hips, the CSI 2000 can be akin to the thighs, and the micro stocks represent the feet. The depiction aptly portrays how the indices stratify the vastness of the Chinese equities landscape.

All CSI indices are branded as “broad-based” indices, reflecting their inherent characteristic of including a wide sampling of stocks that span numerous industries and sectors. This is fundamentally different from “narrow-based” indices, which specifically aim to reflect the performance of particular sectors or themes in the market—a concept that will not be explored on this occasion.

On September 23, 2024, the CSI Index Company introduced a new index, the CSI A500 Index. While one might wonder why a new broad-based index was deemed necessary in what already seems like an expansive suite, especially given that the CSI 500 has already established a significant grouping, the distinction lies in the fundamental approach to the composition of this newly minted index.

The CSI A500 Index selects 500 stocks with higher market caps and liquidity exclusively across a diversity of industries, intending to effectively reflect the most representative companies across various segments of the market. In contrast, the CSI 300 employs a straightforward methodology that gravitates heavily toward market cap and trade volume without filtering industry representation, which leads to a predominance of large finance, energy, and consumer companies that overshadow smaller, but potentially high-performing niche players.

This can lead to interesting market dynamics where the CSI 300, despite its smaller quantity of constituent stocks, has a higher total market value than the broader A500 Index. As of the mid-November 2023 figures, the CSI 300 stood at an aggregate market cap of 56 trillion yuan, while the A500 trailed with 54 trillion.

Thus, the distinction underscores the difference in utilization and representation between the CSI 300 and the new CSI A500, which aims for a broader and more balanced representation across the varied sectors within the Chinese economy.

Based on the available data, the A500 index captures a more evenly distributed sector representation. It could considerably outperform the CSI 300, particularly in years where growth tends to favor smaller, innovative companies. Therefore, if the CSI 300 is regarded as the flagship of broad-based indices within the A-share market, the CSI A500 could potentially be regarded as the “king” of broad-market indices.

As we dissect the overall positioning of A-shares in the current market landscape, an essential factor to consider is valuation. A recent evaluation of the forward price-to-earnings (P/E) ratio and other financial highlights yields interesting insights regarding market status. As of November 15, the TTM (trailing twelve months) P/E ratio for the CSI 300 stands at 12.61, coupled with a dividend yield of 3.61%. Meanwhile, the CSI A500’s TTM P/E ratio hovers at 14.33 with a slightly lower dividend yield of 3.26%.

Ultimately, the 14-year trend indicates that the CSI 300 has fluctuated within a P/E range of 8-20, and currently pads itself at a midpoint level within this timeframe. Analyzing these metrics alongside broader asset classes, specifically assessing return rates against the prevailing 10-year state bonds, illuminates critical financial decisions on investment allocations.

Given that the current yield on 10-year government bonds stands at a substantial low point of 2.10%, the equity risk premium surfaces as a substantial metric to gauge market valuation. With the CSI A500 reflecting a 4.8% equity risk premium at the current P/E ratio, the distinct performance promises a lucrative prospect, especially if market valuations remain lower.

Furthermore, as investor sentiment evolves, many would be inclined toward the relatively newcomer CSI A500 as a route containing the capacity for robust growth, particularly against an environment that showcases upward market movements.

For investors gravitating towards a large-cap value-oriented strategy yet seeking the dynamism of new industry-leading growth stocks, considering the CSI A500 Chengshun (159353), currently exhibiting activity in almost 15 billion yuan of assets, alongside a favorable fee structure, might serve as a stepping stone into this expansive market.

Simultaneously, the recently introduced funds revolving around the CSI A500 find themselves in an advantageous position, especially given the low market valuations coupled with dividend yields surpassing typical bank deposit rates and state instrument returns.

The evolving landscape in which these indices function underscores an exciting chapter for the Chinese equity market and presents numerous opportunities characterized by potential for both stability and growth among diversified portfolios.