“A majority of the new investors in China’s market don’t have a high school education (6% are illiterate). Unlike other major stock markets, which are dominated by professional money managers, retail investors account for around 85 percent of China’s trade. More than 40 million new stock accounts were opened between June 2014 and May 2015. Therefore, the 2014-2015 run-up was clearly a bubble without support from the real economy.Ī big reason for the stock market rally was that a lot of ordinary Chinese people began investing in the stock market for the first time. But the Chinese economic growth has been declining in the past few years and was not expected to go back to the brisk growth in the near future. Meanwhile, the country’s broader economy was going the other way, with economic growth slowing down significantly (the economic growth rate has fallen from double-digit figure in previous years to 7%, dubbed the “New Normal” by Xi-Li leadership.) In other words, in a healthy market, stock market booming usually signals an economic expansion. Many companies with meager earnings (or even losses) were seeing a meteoric rise in their shares. The value of many shares rose at a rate and speed that made little sense. There was a strong sign that the seemingly bull market was actually entering the bubble territory as it is not justified or consistent with the economic fundamentals. Between June 2014 and June 2015, China’s Shanghai Composite index rose by 150 percent. Thus we need to understand what caused the bubble in China’s stock market to form (buying frenzy) and pop (panic selloff). The source of any stock market crash may vary over specific circumstances -, but one general reason remains generically the same: What goes up must come down. Altogether, last summer’s herd stampede has practically erased the Chinese stock market’s gains in the first half year of 2015 completely. However, this relative quietness, along with shares languishing in their lows and low trading volume and volatility, shows that the market is now left in the doldrums, and is likely to be stuck for a long time. As of this writing, as can be seen in the following charts 1 and 2, the market seems to have calmed down with the index hovering around 2900 points (compared to 5178 peaks reached on June 12). Major (more severe) aftershocks occurred around July 27 (the Shanghai Composite Index fell by 8.5 percent, marking the largest fall since 2007) and again on August 24 “Black Monday” (8.5% fall in the Shanghai Composite Index) and August 25 “Black Tuesday” (another 7.6% fall). The Bank of England gave a frightening illustration of the enormous scale of the Chinese stock market rout, stating that the $2.6 trillion wiped off the Shanghai and Shenzhen Composite indexes in the initial 22-day summer market rout is equivalent to the entire GDP of the UK in 2013, and amounts to seven and a half times the nominal value of outstanding Greek government debt. A third of the value of A-shares on the Shanghai Stock Exchange was lost within one month following the event. The Chinese stock market crash began with the popping of the stock market bubble in mid-June (starting on June 15, 2015). Before reaching the ceiling on June 12, 2015, China’s stock market had ballooned about 150 percent in a year.
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