MACROECONOMICS CIA-3

NIKITHA M
1837044
I MAECO
 CHINA’S STOCK MARKET CRASH IN 2015

INTRODUCTION

The trading of shares or securities takes place in an organised platform known as stock
market. Only publicly listed shares can be bought or sold in the stock market. Retail investors
and some of the financial institutions like banks, insurance companies are some of the
participants who trade in the stock exchange. China, the second largest economy in the world
has two independent stock exchanges. They are the Shanghai Stock Exchange and the
Shenzhen Stock Exchange. In terms of the market capitalisation, Shanghai Stock Exchange
forms the 4th largest stock market whereas the Shenzhen Stock Exchange ranks as the 8th
largest stock market in the world. Though the Chinese Stock market outperforms the rest, it
has gone through its share of ups and downs in the past decade. The Stock market crash of
China in mid 2015 stands out as it was the first disastrous economical event in China after the
2008 recession. Though there are no proper definitions for stock market crash but a stock
market is said to have crashed if its index faces a double-digit decline consecutively and there
is no special mention given to the duration. In China, it lasted for about 8 months. It began in
June 2015 and ended in February 2016. The following work identifies the reasons for the
stock market crash and how it affected the business cycle in China.

REASONS FOR THE STOCK MARKET CRASH

Chinese stock market had been experiencing expansionary phase before it crashed in the mid
2015. In the early 2015, the stock market surged up to 150% percent and it was beyond
logical for few of the analysts. The shares of most of the stocks showed upward trend. Even
the value of the ones with less EPS (Earnings Per Share) showed a positive growth. A
warning signal was sent across the capital market but it was completely neglected by
investors. The investors used borrowed funds to raise the stock prices which sent the stock
market stumbling in the mid 2015. The same scenario prevailed in US during 2008 financial
crisis. The share value of the stocks fell by nearly 30% in the initial weeks. China had
stringent policies with respect to margin lending. Only half of the funds invested should come
from margin lending the other half should come from the investor. But this policy was
relaxed in 2010. This led the small scale retailers to borrow excessively and invest it in the
stock market to reap returns. One of the major reasons that contributed to the crash was that
nearly 85% of the investors were small retail traders who were looking for short-run
investments. This increased the volatility by many folds. This was also the time when the
people of China showed great interest in capital market. Nearly 40 million stock accounts
were opened between June 2014 and May 2015 (Hueng et.al, 2017). During this period most
of the companies halted their shares from trading since it was used as collateral for their
loans. The crash did not have much effect on large organisations since 80% of the investors
involved were individuals. But households felt the edge when their stocks came crashing
down since all their savings and borrowed funds were reduced to nothing.
STEPS TAKEN FOR REVIVING THE ECONOMY

The government tried to stabilise the economy by adopting certain measures. Some of the
government companies agreed to buy shares from the stock market to reverse the situation.
Even insurance companies assisted the stock market by providing some credit. The Securities
Regulator of China penalised companies that evaded the margin trading norms. It also
increased the minimum amount of cash required by investors for margin trading which
reduced the number of investors significantly. Raising the threshold allowed only the rich to
participate in the game. The central bank of China practically pumped money into the
Chinese Securities Finance Corporation to alleviate the leveraged investments. The brokers in
China came together to support the economy by buying certain shares in the stock market to
raise the Shanghai Stock Index. These were some of the initiatives taken by the government
and private institutions to normalise the Chinese Stock Market.

STOCK MARKET AND BUSINESS CYCLE

The growth and contraction of an economy is usually reflected in its business cycle. The
business cycle projects the stages an economy might go through. The business cycle of an
economy comprises of the following four stages: Expansion, Peak, Recession and
Depression. This section is mainly attributed to identify the phase the economy went through
when its stock market crashed. The following graph portrays the stance the economy takes on
the business cycle based on its stock market performance.

Source: Market Realist

The shares in the Chinese Stock exchange boomed in the early 2015. This means there was
bullish trend in the market. This was the time when the prices of the shares, stocks or
securities rocketed in the beginning. Correlating this phase of the stock market with the
business cycle, we see that the economy was in the expansionary phase and it peaked when
the value of the shares increased in geometric progression. This should have been seen as a
warning signal since bearish phase usually succeeds the bullish phase. Bearish trend in stock
market reflects fall in share prices by nearly 20%. Eventually mid 2015 witnessed the bearish
trend where the prices of shares dropped and the Stock index declined by a double-digit. The
magnitude of its impact was not what it was expected to be, it was worse. The bearish trend
came as a realisation for the Chinese economists since the economy has moved from peak to
recession. This led the government to come up with measures to prevent the economy from
going into depression. From the graph, we see that decline of stock market ahead of the
recession in the economy. This is because recession strikes the economy only after the
decline in stock prices i.e. the decline in stock market index precedes the recession.

 Was Margin-trading the only reason for the stock market crash?

China had been experiencing double digit growth in the last decade. Being the second largest
economy in the world, it was a major exporter of cotton, tea, rubber and machineries across
the world. But the 2008 recession slowed down its growth and reduced its exports. There was
no effective demand within the country let only exports. The government came up with some
measures to stimulate internal investment. It employed government and local banks and
monetary policies to achieve its goal. In its process to attain its objective, the government
enterprises got stuck in a magnanimous debt and it was the idea of the government to increase
the stock market prices to retrieve itself from the debt trap. But the stock market boom did
not go as planned. The government thought of financing its indebted companies by
stimulating the public to invest in them. Though the government succeeded in creating
enough demand only some of the investment turned out to be wise. This is because, majority
of the investors were individuals who had no clue of what they were investing in. Therefore,
government actions have also been identified as one of the reasons for stock market crash.

 What is the performance of China’s stock market after 2015 crash?

The recent statistics (by Investing Haven) has recognised China to have the emerging stock
market in the world. Chinese stock market has been witnessing stable upward trend since
2017. In 2018, there prevailed a transition from bullish to very bullish trend. After the crash
in 2015, china adopted recovery measures to dodge the depression phase. Now China is
climbing the ladder in terms of growth in the stock market. Chinese government set a target
of 6.5% economic growth for the year 2018. But its results were surpassing. It achieved a
growth rate of 6.8% in 2018 (Tiehang, 2018). This is because China has always been backed
by information and high technological based industries for its growth and it has been the
focus of investment in the recent years along with R&D. Though the 2015 crash sent
stumbling waves across the country, the economy revived and emerged stronger than before.
REFERENCES

Allen,Katie. (2015). Why is China’s stock market in crisis?.

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crisis-explained

Hueng et.al (2017). Understanding the causes of China’s stock market crash in 2015.
Retrieved from: https://www.indrastra.com/2017/10/Understanding-Causes-of-China-s-
Stock-Market-Crash-2015-003-10-2017-0016.html

Jain, Surbhi. (2015). An investor’s key guide to business cycle investing.

Retrieved from: https://marketrealist.com/2015/04/investors-key-guide-business-cycle-
investing

Lee,Timothy. (2015). China’s stock market crash, Explained.

Retrieved from: https://www.vox.com/2015/7/8/8908765/chinas-stock-market-crash-
explained

Tiehang,Niu. (2018). Chinese Economy in 2018.

Retrieved from: https://www.chinausfocus.com/finance-economy/the-chinese-economy-in-
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