Garcia C.P.
Econ 2
2016/09/06
Stock Market in China
China has two stock markets; Shanghai and Shenzhen that operate independently under the control of the China Securities Regulation Commission. The government agency commission has a lot of control on the actions of companies in the stock markets, from issuing initial public offers to controlling the level of price movements in the markets. The Chinese practices sponsored trading through the Chinese Securities Finance Corporation. In 2015, efforts of the holding company to soften the markets were futile with losses going up to $5 trillion. The government of China prioritizes market stability over other factors, and it offers to ease on the market when events turn awry.
The Shanghai stock exchange started after the first opium war, and the first share was listed in 1966. It is based in Shanghai, with a market capitalization of $3.5 trillion, making it among the biggest capital markets in the world. However, the market is tightly controlled by the government with stringent guidelines on capital flows, in and out of the country. On the other hand, Shenzhen stock exchange is based in the Futian district, in the city of Shenzhen. It is smaller than the Shanghai Stock Exchange, but it still boasts of decent market capitalization value, at $2.2 trillion. Like Shanghai, the Shenzhen stock market is tightly controlled by the mainland government, making it very difficult for external investors to buy and sell shares.
The main cause of the stock bubble on the Black Monday, August 24th, 2015 was the devaluation of the Yuan that made the currency weaker that it was before at the face of major world currencies. Also, the crisis was partly brought by the weakening of the Chinese economy, with demand for industrial products going down amid a global economic slowdown. From a microeconomic perspective, investors in the Chinese stock markets had fuelled capital growth the two years before the bubble, using borrowed money. Technically, therefore, the cause of the crisis can be related to the world economic crisis of 2008, where consumers took (mortgage) loans that they were not able to pay. Hence, the bubble can be partly attributed to market corrective measures, after a 43% climb in the previous year, fueled by borrowed capital (Economist).
The impact of the bubble was felt across the globe, with investors in the United States suffering losses from Chinese bound stocks in Chinese-US listed companies like Alibaba.com. Moreover, the dollar rose against major currencies, making US exports more expensive, and hurting the performance of companies that depend on export trade. Also, investors lost confidence in cross-listed stocks between China and the United States, because the bubble had shown that those shares suffered more than the ones listed in Shanghai or Shenzhen, where the government of China uses economic tools to smoothen the markets (Gandel and Jones).
In the aftermath of the bubble, the Chinese government introduced a myriad of measures to stem out of the market crash. More than $5 trillion of value had been swept away in three weeks, ending on the Black Monday when 8.5% of the market value was washed away in stock price losses. The government halted trading in 30% of the companies listed in the stock markets to prevent further losses and banned the listing of new companies into the stock markets (IPOs). Further, to motivate the markets, and considering that 80% of the market players in China are individuals, the government used the main papers to encourage people to continue buying stocks to keep the markets afloat. Other measures included backing stock brokers with government cash and prohibiting owning more than 5% of any company.
Works Cited
Economist, The. “The causes and consequences of china’s market crash.” The Economist. The Economist, 24 Aug. 2015. Web. 10 June 2016.
Gandel, Stephen, and Stacy Jones. “Why china’s stock market rout is a bigger problem than you think, in one chart.” Finance. Fortune, 8 July 2015. Web. 10 June 2016.
