Understanding the Chinese Stock Market

The Chinese Stock Market is known for its volatility, but in 2015, a dramatic drop in the market caused concern around the world. Economists and investors began to worry about a potential global recession.

What’s happened on the market since 2014

Over the last few years, the stock market in China has moved from bubble to bust and from bubble to bust again in a relatively short time, compared to the fluctuations of other stock markets around the world. In a major change, November 2014 saw the China’s Stock Market opened up to overseas investors as the Chinese government began trying to attract foreign capital into the economy. Foreign investors on the Shanghai stock exchange were able to invest up to 30 percent in a single company, directly into mainland Chinese companies, rather than having to invest via offshore subsidiaries.   Once the program was launched, Hong Kong’s Hang Seng index gained by up to 2.4 per cent, before closing 0.8 per cent higher. The Shanghai Composite Index rose by 2.3 per cent, and actually doubled by mid-May 2015.   However, on June 12 2015, the bubble burst. The Shanghai index lost about a third of its value before making a slight comeback, but by July 2015, it had dropped over 30% from its peak.   The Chinese government took action straight away to try to control the downturn. They halted trading on a number of stocks, injected billions into the economy and stopped large shareholders from selling their stocks. Investor confidence seemed to ease for a while but soon the downturn resumed and by August, the index had dropped by over 40% from its June peak. The market experienced a sudden drop of 7% on the 4thJanuary and again on the 7th of January 2016, when the stock market was closed after just 14 minutes of trading.   Here’s a quick look at the figures which show how dramatic the fluctuations were. The Shanghai Composite Index was 2117 on August 1, 2014 but shot up to 4612 by May 1, 2015, and then fell to 2950 on January 13, 2016.

Will market volatility continue?

China’s two exchanges, the Shanghai and Shenzen Stock Exchange, only opened in 1990. They are comparatively new and neither could be called a mature exchange. Stock market authorities are relatively new, too, and still identifying the best way to manage the volatile market. The share structure along with the dividend payout ratio, products and derivatives, is less sophisticated than the more established markets.   With such a young market, investors are relatively inexperienced. These unsophisticated marginal investors are individuals entering the market for the very first time. In fact, research shows that two thirds of these new stock investors in China quit school before the age of 15, and one third did so before 12. Six percent of them are illiterate.   So, the combination of new stock market, inexperienced investors, inexperienced governance and overseas investors testing the market for the first time has all contributed to the volatility.   The big question is whether the Chinese stock market will continue to be volatile and what that means for the long term.   According to a poll by Reuters, many experts believe China’s currency will continue to depreciate and economic growth slow due to a supply glut across sectors, affecting the stability of the markets.   Not all economists agree. Australia’s Reserve Bank governor Glenn Stevens, believes that the volatility of the Chinese stock market and the slowed rate of economic growth are signs that China is heading towards a world of more market flexibility. He also said that “...the recent fall in value of China's currency, the yuan, has been modest and should be a long-term positive.”

How the Chinese economy is affected by the stock market

If you’ve been considering investing in China, you may be questioning whether there is a link between the volatility of the stock market and the health of the Chinese economy.   A joint study by Wharton School and Shanghai Jiaotong University found that “The correlation between market returns and future GDP growth for China, however, is ...statistically insignificant.”   Despite the downturn on the stock market, the economy is still growing at a rate of around 6.5% and the growth is expected to continue. Figures show growth in retail, tourism, real estate and hospitality industries, and that the stock market dive has had little impact on the Chinese people. With only 12% of household wealth tied up in stock market investment, the Chinese people have sufficient money to spend, boosting the economy.

Are you considering investing in China?

If you are looking for business opportunities in China, speak to the team that understands the ways of the Chinese marketplace. The team at Sinorbis will help your business succeed in Chinacontact us today and we’ll help you make the right moves.

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