I’m trying to find some sensible answers as to why the Chinese stock market collapsed. Was it a combination of excessive margin debt, marketplace share manipulation, difficulty of foreign investors to get exposure to Chinese stock market, institutional investors have pulled $22 billion out of Chinese stock funds this year?
http://khaleejtimes.com/biz/inside.asp?xfile=/data/opinionanalysis/2015/June/opinionanalysis_June2.xml§ion=opinionanalysis
“A rise in broker margin debt, sovereign wealth fund sale of Big Four bank shares, 23 new liquidity sucking IPOs, profit-taking after the Comp index traded 50 per cent above its 2015 lows at a seven-year high all played a role in Shanghai’s flameout.”
“Since theoretically it has been shown that the greater the level of asymmetric information, the greater the probability of a market collapse, in the final exercise we, for the first time in this literature, test the relationship between asymmetric information and market collapse. We find that, contrary to the theoretical conjecture, asymmetric information has a very weak effect on market returns on the SHSE: we find that in only around 11% of cases asymmetric information has a statistically significant negative effect on market returns. This finding sheds critical light on the working of the Chinese stock market, in that asymmetric information is a particularly severe problem in China. Chinese firms tend to disclose only incomplete or even biased information about their business. Moreover, in the marketplace share manipulation and insider trading are pervasive. In this environment, while our results show that the illiquidity factor is a source of asymmetric information, asymmetric information does not induce the market collapse.”
“Excessive margin debt can lead to panic selling if the market takes a steep leg down. Margin calls for people who have borrowed money to buy more stock often exacerbate normal stock selling as they are forced to sell stock to meet margin requirements. This can feed on itself and can turn a minor correction into a landslide. The Deutsche Bank team also has spotted eerie similarities in the current margin debt explosion to the 1999 to 2000 technology bubble and collapse, and the great financial crisis of 2007 and 2008.”
I know everyone is using the term, but this isn’t really a crash. The market is down 3000 points, but that’s basically where it was at the beginning of the year. This is just a correction.
Let’s look at a piece from the Investopedia explanation of margin debt:
China was seeing high margin debt (usually associated with a lot of confidence and a market close to it’s peak.) When the margin is close to the account limit and the market stumbles the value of assests owned in the account drops so the debt is relatively larger. That prompts some margin calls to make up the difference. If you don’t have liquid funds to meet the margin call there’s pressure to sell …in an already dropping market… dropping values more…inspiring more margin calls. High margin debt can amplify the movement when there’s a correction.
Here’s a readable explanationfrom the Guardian. Basically an unusually high number of retail investors, many of whom bought on margin, panicking and selling after the previous massive rise (which was pretty much a classic speculative bubble) ran out of steam.
As mentioned in the article, the runup came despite the slowing of the Chinese economy. One other cause was the fall of the real estate market, which reduced the opportunities for investing.
I wonder about the large number of companies which have suspended trading. I’d think that this is going to cause an even greater crash when it resumes, and locks people in to stocks they no longer want to own. The Enron 401K situation comes to mind.
Foreigners pulling money out is to laugh (but a popular meme in China). Foreigners had invested roughly $22 billion dollars out of the market. But the crash has wiped about USD3 trillion dollars of equity off the books.
One metric showed that the typical investor in the Shanghai Stock Market didn’t graduate from high school.
Basically, government influence made a lot of people think that margin financing was great and that markets can never bubble and burst. The government is doing everything possible these days to prove that they can manipulate the market and prevent it from crashing.
Really All That Bright - you have to look at the whole market instead of just the China 300 or whatever manipulated index is on the headlines. The medium and small market cap (think China’s NASDAQ) dropped more or less limit down 10% every day for 20 straight days.
Today of course, majority of stocks are limit up 10% with the exception of the roughly 2/3rds of all stocks that are suspended from trading for 5 days.
It makes a lot more sense if you view it as a giant manipulated casino instead of a market. YMMV.
I read one commentator who suggested (somewhat facetiously) that the government seems to want the stock market to behave much like the currency, allowing it to move up and down but only within a prescribed band.
Interesting how the stock market downturn has been halted.
“Over a period of four weeks, Chinese companies lost some $3.9 trillion in value—a number more than 15 times the size of the entire Greek economy. The Chinese government has employed a range of strategies to halt the slide. Beijing relaxed restrictions on how much investors could borrow to buy stocks, and China’s largest brokerage firms announced a $19.4 billion plan to purchase shares in major companies. The government has restricted new company IPOs—lest they prevent investors from putting their money into companies already selling shares on the stock market—and have meanwhile suspended trading on thousands of other struggling firms. Most recently, China’s securities regulator announced that any shareholder owning stocks worth more than 5 percent of an individual company could not sell those stakes for the next six months. On Thursday, these measures temporarily seemed to work: The Shanghai Composite Index recovered 5.8 percent of its value, while another index, for the smaller stock exchange in the southern city of Shenzhen, jumped by 3.8 percent. Prior to that, each market had fallen over 30 percent since June 12.”