econintersect.com
       
  

FREE NEWSLETTER: Econintersect sends a nightly newsletter highlighting news events of the day, and providing a summary of new articles posted on the website. Econintersect will not sell or pass your email address to others per our privacy policy. You can cancel this subscription at any time by selecting the unsubscribing link in the footer of each email.



posted on 27 August 2015

Explainer: What Role Does The Stock Market Play In The Chinese Economy?

by The Conversation, The Conversation

--- this post authored by Dan Luo, University of Nottingham

Falling four days in a row earlier this week, China's main stock index, the Shanghai Composite, plummeted below the 3,000 threshold. This represents a huge loss of money for the investors involved. But it's worth remembering that the stock market remains relatively peripheral to the wider Chinese economy. Indeed, China's "Black Monday" is more a product of the wider economic concerns the country faces, than it will be a trigger for any kind of economic collapse.

China has two stock exchanges that were established in the early 1990s. Together, they rank second in the world in terms of market capitalisation (the total money market value of the shares being traded), just after the New York Stock Exchange. In terms of the trading volume on the Chinese market, it is four times larger than on the NYSE, with about 3% of the market value being traded every day.

The Shanghai and Shenzhen stock exchanges were established as part of China's economic reform process. Their initial purpose was to assist the reform and privatisation of China's vast state-owned enterprises. It was hoped that they would evolve to form a critical component in the country's financial system, promoting a more efficient allocation of financial resources. But this has not been the case. Accompanied by frequent government interventions and largely closed to foreign investors, China's stock markets remain highly inefficient.

A volatile market

Unlike Western stock exchanges where institutional investors take the leading role, over 80% of the participants in the Chinese stock market are individual investors. Instead of viewing stock market investment as a long-term investment, they tend to bet on speculative returns. This has directly led to big boom and bust cycles.

Boom and bust cycles: China's benchmark stock index, the Shanghai Composite from 2006. MarketWatch

Since the last stock market bubble of 2006-07, Chinese stock markets remained gloomy for about seven years until mid-way through 2014 - as shown in the graph above. The resurgence in stock market activity was a result of government regulators increasing the amount of credit available to individual investors. It also coincided with a contraction in the real estate market, which had formerly been the main investment option for individuals.

The lack of correlation between China's stock market performance and the country's economic performance exemplifies its peripheral nature to the wider economy. When the market crashed in October 2007 (before the credit crunch had a serious impact on the world financial system), economic growth in China remained steady. Similarly, China's stock market upsurged before the recent crash, despite the country's economic growth declining to a decade-low level. The rollercoaster ride of the stock market is therefore much more closely related to the speculative behaviour of investors - not the wider economy.

Government action

When the stock market began to plummet earlier this July, the Chinese government reacted quickly and decisively, implementing a full pack of rescue measures to stabilise the market. These ranged from direct share purchase to the investigation of any illegal behaviours of the people involved. It spent 5 trillion RMB (US$800 billion or the equivalent of almost 10% of China's GDP in 2014) in its reserve, to prop up its wobbly stock markets.

But the impact of this huge rescue effort did not achieve the desired outcome. After recovering gradually by about 1,000 points, the market collapsed again, seemingly after disappointing data suggesting further slowing in China's industrial activity and by the failure of the Chinese government to unveil bold enough market interventions to prop up equity prices.

In many ways the crash has been a correction that better reflects the value of Chinese stocks. But a mood of panic entered the market. Fears over China's slowing economy were accompanied by a lack of confidence in the ability of the Chinese authorities to prop up the market.

Now the government has implemented the measures that were previously expected. The People's Bank of China (the country's central bank) has cut interest rates and promised to pump more liquidity into the banking sector. We can expect the stock market to stop dropping as a result and edge back to a level that is closer to its true value (around 3,500-4,000 points).

The need for strong government intervention raises serious concerns about China's plan to further liberalise its financial system to bring in greater competition and to turn the country's currency, RMB, into an international currency. It is clear that China's attempts to reform itself towards a full market-based economy has come to a critical stage and the government will be extremely cautious about further steps forward. Nevertheless, it was lucky that unlike the US or UK where a large population is exposed to the market, China's stock markets have little connection with its real economy and play a much smaller role in its economic development.

The ConversationDan Luo is Assistant Professor of Economics and Finance at University of Nottingham

This article was originally published on The Conversation. Read the original article.

>>>>> Scroll down to view and make comments <<<<<<

Click here for Historical News Post Listing










Make a Comment

Econintersect wants your comments, data and opinion on the articles posted. You can also comment using Facebook directly using he comment block below.




Econintersect Contributors


search_box

Print this page or create a PDF file of this page
Print Friendly and PDF


The growing use of ad blocking software is creating a shortfall in covering our fixed expenses. Please consider a donation to Econintersect to allow continuing output of quality and balanced financial and economic news and analysis.


Take a look at what is going on inside of Econintersect.com
Main Home
Analysis Blog
Men Without Work
Slow Economic Growth Will Be Around For A Long Time
News Blog
Early Headlines: Asia Stocks Mixed, Dollar, Oil Up, Gold Down, Article 50 Day, Westinghouse Files Ch. 11, Trump Wants $1B To Start Wall, Russian Protests, China's $8T Shaky Debt, And More
Thirty Plus Terror Suspects And Convicts Not A Rare Occurrence In UK
The Winners And Losers In Trump's Proposed Budget
God and America (Version 3)
Corning's Glass Brimming With Taxpayer Subsidies
Who Americans Consider Their Greatest Enemies
Has The IPad Become A Sideshow Act?
Terrorism In Westminster: London Had Expected Attack For Some Time And Police Reaction Was Rapid
Are Smartphones Killing Digital Cameras
What We Read Today 28 March 2017
NASA Precise Landing Technologies Tested On Vertical Testbed Rocket
March 2017 Conference Board Consumer Confidence Highest Since 2000
Richmond Fed Manufacturing Survey Again Improves In March 2017.
Investing Blog
Investing.com Technical Summary 28 March 2017
The Dollar's Coming Impact On Markets
Opinion Blog
Free Immigration Is The Moderate, Common-Sense Position
Macron May Lead But Le Pen Remains The Big Story
Precious Metals Blog
These Gold Stocks Will Produce Much Bigger Gains Than Gold Itself
Live Markets
28Mar2017 Market Close: US Stocks Posted Gains, DOW Closed Up 150 Points, Crude And US Dollar Steady
Amazon Books & More






.... and keep up with economic news using our dynamic economic newspapers with the largest international coverage on the internet
Asia / Pacific
Europe
Middle East / Africa
Americas
USA Government































 navigate econintersect.com

Blogs

Analysis Blog
News Blog
Investing Blog
Opinion Blog
Precious Metals Blog
Markets Blog
Video of the Day
Weather

Newspapers

Asia / Pacific
Europe
Middle East / Africa
Americas
USA Government
     

RSS Feeds / Social Media

Combined Econintersect Feed
Google+
Facebook
Twitter
Digg

Free Newsletter

Marketplace - Books & More

Economic Forecast

Content Contribution

Contact

About

  Top Economics Site

Investing.com Contributor TalkMarkets Contributor Finance Blogs Free PageRank Checker Active Search Results Google+

This Web Page by Steven Hansen ---- Copyright 2010 - 2017 Econintersect LLC - all rights reserved