The Crash of Chinese Stock Market in 2015
Vu Phuong Mai

Dang Mai Phuong

Nguyen Thanh Nam

Nguyen Truc Quynh

Pham Thanh Nhan


2

Outline



OVERVIEW OF CHINA’S STOCK MARKET



THE CRASH OF CHINA’S STOCK MARKET IN 2015



EFFECTS OF THE CRASH


3

OVERVIEW OF CHINA’S STOCK MARKET
History
Development


4

History





1984: first publicly issued stock since 1949
1990: establishment of 24 regional stock exchanges
Late 1990: formally re-established two fully functioning national stock
exchanges. All Chinese share trading was gradually moved to these two
exchanges beginning in late 1990 and also the Hong Kong Stock Market in 1999


5

Shanghai Stock Exchange

Shenzhen Stock Exchange

Hong Kong Stock Exchange


6


Development

 Until now
 Past 20 years: China’ s economy: growing at 9 percent each year and

creating a major pool of privately held savings, some 9.8 trillion Yuan ($
1.18 trillion)

 Today: More than 1,000 companies and very active trading in both markets
 China’s stock market plays an essential role in financing companies in
various industries and regions in China

 The stock markets, along with commercial banks, insurance companies,
and other financial markets and institutions, have formed an integrated
financial system to serve the rapid growing Chinese economy.


7

THE CRASH OF CHINA’S STOCK MARKET IN 2015
1.
2.
3.

Happening
Causes
Chinese government’s responses



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Happening

8

12 June:

•

Fluctuations in the stock market

•

Predictions about an impending fall in the Shanghai Composite and Shenzhen stock market


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Happening
2 July

9

•

The Shanghai Stock bubble burst when stock index fell below 4,000 points for the first time

•


Over US$ 3 trillion were wiped off the country’s stock market since the slowdown
-> Large scale panic among the investors.

•

Nearly half of the 2,800 companies trading in China chose to pull their shares out of the stock market.


10

Causes



Bye-Bye Margin Trading



The China Securities Regulatory Commission, or CSRC, banned China’s three largest
brokerages from allowing new margin trading accounts for the next 3 months.



Buying stocks on margin is the concept of borrowing money from a broker to
finance additional stock purchases one could not otherwise afford
=>Large opportunity for reward, but similarly the risk to the



investor is immense


Between June and January, outstanding margin loans have nearly tripled, soaring from $64
billion to $177 billion


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Causes



Housing Bubble Bursting

 Over the last four months, 67 out of the 70 cities tracked by the Chinese
government: home prices decline or remain stagnant in successive months

 According to a December article in the New York Times, developers are holding
two to three times their normal apartment inventories in major Chinese
markets

 Central government took action in November, lowering interest rates


12

Causes



Bubble in stock market because of government’s policy to encourage

participation of general public



The stock market was forming a bubble between June 2014 and June 2015: stock prices
increased by 150%.



Main reason : Banking system was encouraged to allow people to borrow money and
purchase shares.
Between June 2014 and June 2015: 40 million new



Nearly ten million new share buyers joining the trading

accounts


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Government’s policy to encourage participation of general public

13

•
•

Stock prices increased by 150%

40 million new accounts


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Causes


Secular Growth Deceleration



China grew at just 7.4% in 2014 - its lowest rate in 24 years - as “the new normal.”



Slowing growth means less prospects for companies in future.
=> motivation to sell shares.



Policy maker’s inability to rescue the market has shocked the investors who later sold shares to
save their money


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Chinese government’s responses




June 24: the State Council released a draft proposal to relax the maximum loanto-deposit ratio, currently at 75 percent.



June 27: the People’s Bank of China stepped in to stop a sell-off in Chinese stock
markets



June 29: the Ministry of Human Resources and Social Security and the Ministry
of Finance published draft regulations allowing pension funds managed by local
governments to invest in stocks, funds, private equities, and other stock-related
products


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Chinese government’s responses



July 1: the CSRC (China Securities Regulatory Commission) allowed investors to use
homes and other real assets as collateral to borrow money to purchase stocks.



July 4: 21 brokerages set up a fund worth about $19 billion to buy shares.




July 5: the CSRC said the PBOC will “uphold market stability”



July 8: CSRC banned shareholders with stakes above 5 percent from selling shares
for six months.


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Effects
1. On China’s economy
2. On Vietnam’s economy


18

On China’s econom y

•

Figure 7
Households lost $900 billion since
market peak on June 12

•

Assume that households are the
ultimate owners of the shares held

by institutions then their losses
would approach $1.4 trillion

•

The share holdings of Chinese
households need to be put into
perspective of overall household
wealth


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On China’s economy
Consumer Spending

•

Chinese households hold the majority of
their financial wealth in the form of bank
deposits. In short, the recent nosedive in
the Chinese stock market has imparted a
decline in household net worth on the order
of only 3 percent or so.

•

In sum, the recent swoon in the Chinese
stock market may weaken, but not
depress, growth in real consumer spending
in China because stocks play a relatively

minor role in the portfolios of many
Chinese households.

Figure 8


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On China’s econom y
Consumer Spending

•

History provides some interesting
insights. The past two years is not the
first episode of volatility in the Chinese
stock market.

•

Personal consumption expenditures
(PCE) shows that the stock market
swings during this recession period do
not appear to have had a major effect
on Chinese consumer spending.

•

Clearly, there are more important
factors influencing growth in Chinese

consumer spending than simply
changes in share prices.

Figure 9


21

On China’s econom y
Investment Spending

•

The sharp decline in share prices in implies that
the cost of capital for Chinese businesses has
risen, which could exert a depressing effect on
BFI (business fixed investment) spending.

•

However, the ongoing stock market crash in
China may not have as large a depressing effect
in BFI spending in China

•

The equity market in China is relatively small in
relation to the size of the overall financial
system. Although the run-up in share prices in
China over the past two years would have

pushed up the ratio, the larger point is that
China is, and remains, an economy that is
largely bank financed.

Figure 10


22

On China’s econom y
Investment Spending

•

The PBoC has reduced its benchmark
lending rate by 115 bps since November
and further rate cuts seem likely.

•

Banks appear to be reducing the
interest rates they actually charge
business and consumers more or less in
line with the reduction in the PBoC’s
policy rate.

•

BFI spending in China may be less
affected by the recent swoon in equity

prices than many observers may
naively assume

Figure 11


23

Vietnam’s economy



It can be imagined that the first consequence was
the massive losses and damages of the Vietnamese
investors in the Chinese stock market. However, the
situation may only result in a very narrow range.



Shift of investment portfolios coming from not only
Chinese but also of other international investors

Direct impacts

towards the stock market of Vietnam



Vietnamese stock market might fall into their sights,
but how many of them and how much capital would

they allocate to the market was another story,
depending directly on its relative attractiveness
compared to other markets around the world


SHCOMP

24

Historical data of SHCOMP and VNINDEX from 1/6 to 25/9

VNINDEX


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Vietnam’s economy



Through trade channels between China and
Vietnam



The slowdown of total demand caused negatively
impact on Vietnam's export product to this
country.

Indirect impacts




Weakening aggregate demand and decreasing
economic growth would led to pressure to
devaluate the Chinese currency. In August 2015,
Chinese currency devaluated by nearly 3 percent.
As China is the biggest import partner of Vietnam,
we can suffer from this change.