China Stock Market
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Transcript of China Stock Market
An Analysis of Shanghai Stock Exchange Movement in 2000-2007: Is It A Bubble Pattern?
Liu Pei
Septian Hario Seto
Simon Huang He
Agenda Overview: Recent China Economic
Indicators Structure And Development Of China Stock
Market Recent Movement Analysis On Shanghai
Stock Exchange Stock Bubble And Its Pattern
Structure and Development of Shanghai Stock Exchange
Topic To Be Discussed
Overview of China Recent Economic Indicators
Structure and Development of Shanghai Stock Exchange
GDP Growth and CAB to GDP Ratio
Increase Inflationary Pressure…
Tightening Monetary Policies
Negative Interest Rate…
November year on year inflation rate announced by National Bureau of Statistic of China in 6.9% Vs 6.48 % interest rate on 6 month deposit rate Negative interest rate.
Shanghai Stock Exchange (SSE) Founded on Nov. 26th,1990 Non-profit-making membership institution Most preeminent stock market in Mainland
China
Type of shares
A share dominated in Yuan. Listed in Shanghai and Shenzhen Stock Exchange. Initialy listed in Nov 1984.
B share dominated in US Dollars. Listed in Shanghai and Shenzhen Stock Exchange. Initialy listed in 1992 Feb.
H share dominated in HKD, listed in Hongkong Stock Exchange, initialy listed in 1993.
More Details About A Shares
State-owned shares. Takes most weight, non tradable. Corporation stocks Owned by corporations or social institutions,
non tradable. Exchange stocks All tradable stocks holding by individuals
and institutions.
Limitied Investment Choices
NO MORTGAGE MARKET NO FOREIGN EXCHANGE MARKET PROHIBITED TO SHORT Limited Free Float on Shares
Variety of functions of SSE
Providing marketplace and facilities for the securities trading
Formulating business rules Accepting and arranging listings Organizing and monitoring securities trading Regulating members and listed companies Managing and disseminating market
information
SSE Composite Index
Constituents for SSE Composite Index are all listed stocks (A shares and B shares) at Shanghai Stock Exchange.
The Base Day for SSE Composite Index is December 19, 1990. The Base period is the total market capitalization of all stocks of that day. The Base Value is 100. The index was launched on July 15, 1991.
Strong Growth of Investors and Listing Companies
SSE Market Value…
Recent Movement Analysis on Shanghai Stock Index
Topic To Be Discuss
Fundamental Reason : Link between Stock Index and GDP ?
Other Reason : Link between Stock Index and Government Policy?
Market Easy To Be manipulate Decreasing Trend June 2001 – April 2005 Increasing Trend from May 2005 - Now
Link To GDP ? No…!
Fundamental Analysis Link between GDP and Index Movement…?
No..!• As we could see to the chart• From May.2001 to April.2005, China’s GDP grow
on a average base of 9%,total growth of 84%.• And the GDP total growth from 11.59 billion to
22.25 billion (US Dollar).• But the Shanghai's Index fall down from 2245 to
988,total lost of 56%
Link To Government Policy? Yes…!!
29/4/1997
19/5/1999
5/4/1996
29/5/2001
6/6/2005
6/6/2005
16/10/2007
Link To Government Policy? Yes…!
Government Policy Analysis Link between Government Policies and Index
movement…? Yes…! A few major policy changes inside this:
• 5/4/1996: First time to low interest rate since 1990• 29/4/1997: Forbidden of investment in stock market for listed
companies• 19/5/1999: People's Daily: <A correct understanding of the
current stock market>• 29/5/2001: The start of reduction of “state-owned shares”• 6/6/2005 : The start of “Share Reform”• 16/10/2007:The end of “17th Conference of CCP”
Market Easy To Be Manipulate
Data: Dec.4, 2007
12.84%3294.47422.95MetalAluminium China60160
8.61%3886.89334.76BankBank of Communications60132
39.12%4838.481892.8BankChina Commercial Bank60003
16.82%5594.36940.88InsurancePing An of China60131
7.64%10623.53811.69EnergyChina Shenhua Energy60108
2.93%11700.48342.67BankBank Of China60198
4.32%12108.88523.35InsuranceChina Life60162
12.16%15096.151834.94EnergySinopec China60002
4.81%20453.43983.33BankICBC60139
1.85%49531.96917.7EnergyPetro China60185
PercentageTotalValue
TradingValue
TypeCompanyCode
Market Easy To Be Manipulate For example, Petro China:
• Due to the calculation method of Shanghai Index, it’s 4953.2 billion RMB total market value contain 24.8% of the Index !
• But only 91.7 billion RMB, which means 1.85% could be trade in the market, and the rest share is owned in the government !
• The government could easily control the whole market.
SSE Index Movement 2000-2007
The Reason of Decreasing Trend June 2001- April 2005
Privatization of state owned entities (SOE): Initial Public Offering (IPO)
The “Macro-economical control” Improvement on regulation
The Reason of Decreasing Trend June 2001- April 2005
The Privatization of SOE: IPO • Government was pushing low efficiency SOE to
IPO• Over value of IPO price.
The “Macro-Economical control”• As some state-economist says that 7% should
be a “Persistent Growth Rate” , then the government try to cool down the growth
The Reason of Decreasing Trend June 2001- April 2005
Improvement on Regulation • In 2001, Ms. Meilun Shi, a well experienced per
son in Hongkong capital market, becoming new Chief of China Securities and Exchange Comission. Since that time, she introduced many regulations to improve China’s capital market.
The Reason of Increasing Trend May 2005 - Now
IPO : Stop of IPO process
The stop of reduction of “state-owned
shares”
Share status reform !
The Reason of Increasing Trend May 2005 - Now
Stop of IPO process to reform and privatize SOE• Finally The Government stop the way to use stock market
to help the incurable companies.• The Government start to permit small private business to
IPO
The stop of reduction of “state-owned shares”• In Oct 2001, facing a fall down of 50% in 3 months, it
pause. In Jun 2002, it finally stops. • It stops the falling down trend, but it does not make the
market go up again.
The reason of Increase from May.2005
Share Reform ! • Change the status of “Non-tradable” share,
such as State-owned shares and Corporation stocks
• The general reform price : Free 3 shares for every 10 exchange share
• The introduction of warrant• This is the major reason of the new round of
stock market bullish since May 2005
Academic Analysis On Bubble And Its Pattern
Topic To Be Discuss
Academic Research on Bubble Pattern of Stock Bubble Pattern Analysis in China Stock Market
Several Definition About Bubble
Increase on Stock prices due to expectation of further increase (Schiller, 2005)
The level of price changes and fluctuation which can not be explained by asset pricing models which is usually used to measure the effect of fundamentals.
Any period when there is sharp decline on assets prices after rising period (Mishkin and White, 2003)
Characteristic of Stock Bubble
Main Characteristic of Stock Bubble: Stock movement can not be explained by
fundamental valuation model Crowd psychology Excessive
Speculation Sharp rise on volatility
NIKKEI Bubble Burst 1989-1991
NASDAQ Bubbles Burst 1999-2002
SSE Index Bubble…?
Similar Pattern…
The Highest P/E Ratio In 2007
Conclusion
Reason To Say “Bubble”
High P/E ratio comparison to another countries. Movement on price could not explain by economic
and companies performance. Government Policy play important role on market
movement and companies strategies Market very volatile. Very small stock float made market very easy to
be manipulate.
When It Will Be Burst…?
Very Difficult to Answer… There is no academic research could answer
when the bubble will burst. But, we are convinced that current pattern could
not last forever. All the market movement is Government Policies
driven. Need a smooth transition to avoid bubble burst
Bibliography Mishkin, Frederic S and Eugene N. White. 2003. U.S Stock
Market Crash and Their Aftermath. MIT Press: Massachucetts.
Schiller, Robert J. 2005. Irrational Exuberance: Second Edition. Currency Double Day: New York
Asian Development Bank Report : Asian Economic Monitor December 2007. www.adb.org
www.finance.yahoo.com www.ft.com www.stats.gov.cn www.sse.com.cn