The Chinese Stock Market Crash.doc

1、1The Chinese Stock Market CrashThe Big Crash Chinas stock market has been on a wild ride in recent months. It shot way up and many Chinese investors jumped in， hoping to get rich quickly. However， the Chinese stock market has tumbled since June 12， 2015. The Shanghai Composite - the worlds third lar

2、gest stock exchange if you add up the value of its companies - has lost 24% since June 12， putting it officially in bear market territory. By 8?C9 July 2015， the Shanghai stock market had fallen 30% over three weeks as 1，400 companies， or more than half listed， file for a trading halt in an attempt

3、to prevent further losses. Values of Chinese stock markets continued to drop despite efforts by the government to reduce the fall. The bears are growling even louder on the smaller Shenzhen Composite， down roughly 30% in the same period. By the end of July 7th trading in over 90% of the 2，774 shares

4、 listed on Chinese exchanges was suspended or halted. 2Shares have fallen by a third in less than a month， wiping out some $3.5 trillion in wealth， more than the total value of Indias stock market. In the year leading up to the crash， enthusiastic individual investors continued inflating the stock m

5、arket bubble through investment in stocks， exceeding the rate of economic growth and profits of the companies they were investing in. Investors faced margin calls on their stocks， and many were forced to sell off shares in droves， precipitating the crash. The Government has launched a “Patriotic Fig

6、ht” to save Its Stock Market For China， this isnt just a financial crisis， its a political one. Thats why the Chinese government is doing everything it can to try to stop the bleeding. Chinas main stock markets are in meltdown mode. Since June 12， the Shanghai Composite has lost an unnerving 32%. Th

7、e Shenzhen market， which has more tech companies and is often compared to Americas Nasdaq index， is down 41% over the same period. On Wednesday， Chinas Securities Finance Corporation- known as CSF - announced that it will lend billions to big 3Chinese brokerage firms so they can buy more stocks. The

8、 goal is to purchase enough shares that stock prices stop plunging. A spokesperson for the China Securities Regulatory Commission called the bloodbath in Chinese stocks an “irrational sell-off， ” but some called Chinas markets a bubble this spring.The countrys economy is also slowing. Buying stocks

9、is just one effort China is taking. Beijing has done everything it can to stop the sellingthere have been trading halts of 45% of the stocks traded in the market， Chinas securities regulator has banned major shareholders of companies from selling any of their stakes for six months， there is a plan t

10、o provide billions of dollars to 21 brokerages to prop up share prices and limit margin-related selling， insurance companies have been allowed to buy more blue chip stocks. Because the Chinese markets are made up of mostly individuals and not institutional funds， state-run media continued to persuad

11、e its citizens to purchase more stocks. 80% of investors in China are individuals. China is not the first country to prop up a falling stock market. Governments and central banks in America， Europe and Japan have form in buying shares after crashes and cutting 4interest rates to cheer up bloodied in

12、vestors. In addition， China Securities Regulatory Commission（CSRC） imposed a six-month ban on stockholders owning more than 5 percent of a companys stock from selling those stocks， resulting in a 6 percent rise in stock markets. Further， around 1，300 total firms， representing 45 percent of the stock

13、 market， have suspended the trading of stocks since 8 July. China Stock Crash Could be a Long Term Opportunity Does the swift drop in Chinese stock prices say something about the prospects for economic growth， or does it at least diminish hopes for a robust economic picture in China？ Pessimists thin

14、k that the market crash presages an economic collapse. That is most unlikely. True， the stock market is down by a third in a few weeks， but it has fallen back only to March levels； it is still up by 75% in a year. The stock market still plays a small role in China. The freefloat value of Chinese mar

15、ketsthe amount available for tradingis just about a third of GDP， compared with more than 100% in developed economies. Less than 15% of household financial assets are invested in the stock market， which is why soaring shares did little to boost consumption and their 5crash should do little to hurt i

16、t. The falling Chinese stock market is a frightening spectacle， given that China has been a driving force behind global growth for decades. But it isnt likely to amount to the long-term， worst case scenario that is rousing fears in the media. In fact， what we may be seeing is part of a larger and ne

17、cessary rebalancing that all rapidly growing economies must eventually undergo ?C amplified in this case to the extremes that have come to characterize Chinas rise. Whereas the U.S.， along with other developed economies in the West， have been running current account deficits since long before the fi

18、nancial crisis of 2008， China has been running a massive current account surplus -a sort of reversal of historical balances between established and emerging economies. For years now， Chinas model for growth has been to reinvest GDP into assets expected to stimulate growth， and it has responded to eq

19、uity pullbacks with easy money policies like rounds of quantitative easing ?C a strategy that now appears to have reached the point of diminishing returns. The Crash will Spur Reform of the Mainland Stock Market Mainland stock markets are now linked with those in Hong 6Kong and the global stock mark

20、et via mechanisms like QFII and Shanghai-Hong Kong Stock Connect. The interaction between foreign capital flowing in and mainland capital has undoubtedly increased fluctuations of the stock markets. There is no point denying foreign investment is a major player in the mainland market. It has played

21、a role in recent stock market turbulence. Mainland individual investors， who clearly lacked a comprehensive understanding of new derivatives like securities margin trading and index futures trading， failed to remain vigilant when the market rose and acted irrationally when the market fell. The centr

22、al governments forceful measures to intervene in the stock market to curb malicious short-selling and calm the nerves of individual investors are only temporary solutions that will not last for long. The central government will expedite the merging process of mainland securities companies in order t

23、o form a large-scale investment bank that is capable of competing against foreign institutional investors. The securities and futures fund companies will be required to consciously operate according to the law and to strike a balance between maximizing shareholder interests and 7safeguarding the healthy functioning of financial markets.