Chinese Market Crash 2015

The Chinese stock market turbulence began with the popping of the stock market bubble on 12
June 2015 and ended in early February 2016. A third of the value of A-shares on the Shanghai
Stock Exchange was lost within one month of the event. Major aftershocks occurred around 27
July and 24 August's "Black Monday". By 89 July 2015, the Shanghai stock market had fallen 30
percent over three weeks as 1,400 companies, or more than half listed, filed for a trading halt in
an attempt to prevent further losses. Values of Chinese stock markets continued to drop
despite efforts by the government to reduce the fall. After three stable weeks the Shanghai
index fell again on 24 August by 8.48 percent, marking the largest fall since 2007.

At the October 2015 International Monetary Fund (IMF) annual meeting of "finance ministers
and central bankers from the Washington-based lenders 188 member-countries" held in Peru,
China's slump dominated discussions with participants asking if "Chinas economic downturn
[would] trigger a new financial crisis. By the end of December 2015 China's stock market had
recovered from the shocks and had outperformed S&P for 2015, though still well below the 12
June highs. By the end of 2015 the Shanghai Composite Index was up 12.6 percent. In January
2016 the Chinese stock market experienced a steep sell-off and trading was halted on 4 and 7
January 2016 after the market fell 7%, the latter within 30 minutes of open. The market
meltdown set off a global rout in early 2016.

According to 19 January 2016 articles in the Xinhua News Agency, the official press agency of
the People's Republic of China, China reported a 6.9 percent GDP growth rate for 2015 and an
"economic volume of over ten trillion U.S. dollars". Forbes journalist argues that the "stock
market crash does not indicate a blowout of the Chinese physical economy." China is shifting
from a focus on manufacturing to service industries and while it has slowed down, it is still
growing by 5%. After this last turbulence, as of January 2017 the Shanghai Composite Index has
been stable around 3,000 points, 50% more than before the bubble.

What was behind the dramatic rise in shares?

Investors have been piling in, encouraged by falling borrowing costs as the central bank
loosened monetary policy. Unlike most other stock markets, where investors are mostly
institutional, more than 80% of investors in China are small retail investors. The rise was also
fuelled by a switch away from property investment following a clampdown by the government
on excessive lending by banks. Laws liberalising the stock market also made it easier for funds
to invest and for firms to offer shares to the public for the first time. The past six months have
seen a record number of businesses listed on the Shanghai and Shenzhen exchanges.

Why did the market turn?

Analysts were already warning that the dramatic rise in Chinas stock markets was driven by
momentum rather than fundamentals. Stocks were looking wildly overvalued at a time when
the Chinese economy was losing steam. As fears grew that the rise in many stocks was
unsustainable, the selling started. Even Chinas bullish securities regulators admitted markets
had become frothy before they turned down.

How could so many people afford to buy shares?

At the center of the dramatic stock market slide are individual investors borrowing from a
broker to buy securities. There has been an explosion in so-called margin lending. Under that
system, the broker can make a demand for more cash or other collateral if the price of the
securities has fallen known as a margin call.

What is the problem with margin calls?

In short, the problem for Chinas 90 million or so retail investors is that shares can go down as
well as up. Margin calls are in no way exclusive to Chinese markets. But the mix of investors is
unusual compared with most global markets. As brokerages have lapped up peoples appetite
for borrowed money and stock market bets, more households have become exposed to the risk
of a stock market correction. Regulators have cracked down on margin trading in recent
months and the resulting falling share prices have triggered margin calls. If those margin calls
continue, investors will have to offload other assets to come up with the cash they need.

What are companies doing?

About 1,300 companies have suspended their shares almost half the market in what
analysts see as an attempt to sit out the rout. Some companies have suspended trading
because they have used their own stock as collateral for loans and they want to lock in the
value for the collateral, said Christopher Balding, a professor of economics at Peking
University.

What are the Chinese authorities doing?

Beijing has supported a series of market operations to halt the sharp decline, but each one has
been criticised for failing to restore market confidence. China has arranged a curb on new share
issues and enlisted brokerages and fund managers to buy massive amounts of shares, helped by
Chinas state-backed margin finance company, the China Securities Finance Corporation (CSFC),
which in turn has a direct line of liquidity from the central bank. The central bank, the Peoples
Bank of China, said it would continue to work with the CSFC to steady the stock market. The
CSFC also said it would purchase more shares of small and medium-size listed companies the
firms that have suffered the biggest losses in the rout.

How worried is the government?

The rapid decline of a previously booming stock market has become a major headache for the
president, Xi Jinping, and Chinas senior leaders, who are already struggling to avert a sharper
economic slowdown. nalysts say the government sees the strength of the Chinese stock market
as a sign of its own clout, hence all the attempts to steady the market. Mark Williams, of the
consultancy Capital Economics, said: Chinas leadership has doubled down on its efforts to
prop up equity prices, because it believes that its own credibility is now coupled to continued
gains on the markets. Because so many of the investors in the market are individuals, the
government will be acutely aware that deepening losses risk denting the real economy and
even fuelling social unrest. Then again, in a statement on the economy this week, the premier,
Li Keqiang, failed to mention the deepening market crisis.

What is the economic backdrop?

Chinas economy was already losing steam. Its GDP growth rate halved from 14% in 2007 to
7.4% last year. The next GDP figures in mid-July are expected to show the slowest growth since
before the financial crisis. In a sign of softening demand, imports have been falling in recent
months. Exports have also eased off, despite government measures to stimulate growth. But
analysts are divided over the scale of the risk to the real economy from the stock market
turmoil. They question the strength of links between the two. Jasper Lawler, an analyst at CMC
Markets, said: It goes without saying that movements in the Chinese stock market dont
necessarily correlate to Chinas economy. This applied on the way up when Chinese stocks
rallied more than 100% in the space of a year while economic growth was the slowest in six
years. This should also be the case on the way down; just because stocks are crashing, it doesnt
necessarily have a knock-on effect on Chinas economy.