The crash of chinese stock market and impact

The Crash of Chinese Stock Market in 2015 Vu Phuong Mai Dang Mai Phuong Nguyen Thanh Nam Nguyen Truc Quynh Pham Thanh Nhan Outline  OVERVIEW OF CHINA’S STOCK MARKET  THE CRASH OF CHINA’S STOCK MARKET IN 2015  EFFECTS OF THE CRASH OVERVIEW OF CHINA’S STOCK MARKET History Development History    1984: first publicly issued stock since 1949 1990: establishment of 24 regional stock exchanges Late 1990: formally re-established two fully functioning national stock exchanges All Chinese share trading was gradually moved to these two exchanges beginning in late 1990 and also the Hong Kong Stock Market in 1999 Shanghai Stock Exchange Shenzhen Stock Exchange Hong Kong Stock Exchange Development  Until now  Past 20 years: China’ s economy: growing at percent each year and creating a major pool of privately held savings, some 9.8 trillion Yuan ($ 1.18 trillion)  Today: More than 1,000 companies and very active trading in both markets  China’s stock market plays an essential role in financing companies in various industries and regions in China  The stock markets, along with commercial banks, insurance companies, and other financial markets and institutions, have formed an integrated financial system to serve the rapid growing Chinese economy THE CRASH OF CHINA’S STOCK MARKET IN 2015 Happening Causes Chinese government’s responses Click icon to add picture Happening 12 June: • Fluctuations in the stock market • Predictions about an impending fall in the Shanghai Composite and Shenzhen stock market Click icon to add picture Happening July • The Shanghai Stock bubble burst when stock index fell below 4,000 points for the first time • Over US$ trillion were wiped off the country’s stock market since the slowdown -> Large scale panic among the investors • Nearly half of the 2,800 companies trading in China chose to pull their shares out of the stock market 10 Causes  Bye-Bye Margin Trading  The China Securities Regulatory Commission, or CSRC, banned China’s three largest brokerages from allowing new margin trading accounts for the next months  Buying stocks on margin is the concept of borrowing money from a broker to finance additional stock purchases one could not otherwise afford =>Large opportunity for reward, but similarly the risk to the  investor is immense Between June and January, outstanding margin loans have nearly tripled, soaring from $64 billion to $177 billion Click icon to add picture Government’s policy to encourage participation of general public 13 • • Stock prices increased by 150% 40 million new accounts 14 Causes  Secular Growth Deceleration  China grew at just 7.4% in 2014 - its lowest rate in 24 years - as “the new normal.”  Slowing growth means less prospects for companies in future => motivation to sell shares  Policy maker’s inability to rescue the market has shocked the investors who later sold shares to save their money 15 Chinese government’s responses  June 24: the State Council released a draft proposal to relax the maximum loanto-deposit ratio, currently at 75 percent  June 27: the People’s Bank of China stepped in to stop a sell-off in Chinese stock markets  June 29: the Ministry of Human Resources and Social Security and the Ministry of Finance published draft regulations allowing pension funds managed by local governments to invest in stocks, funds, private equities, and other stock-related products 16 Chinese government’s responses  July 1: the CSRC (China Securities Regulatory Commission) allowed investors to use homes and other real assets as collateral to borrow money to purchase stocks  July 4: 21 brokerages set up a fund worth about $19 billion to buy shares  July 5: the CSRC said the PBOC will “uphold market stability”  July 8: CSRC banned shareholders with stakes above percent from selling shares for six months 17 Effects On China’s economy On Vietnam’s economy 18 On China’s econom y • Figure Households lost $900 billion since market peak on June 12 • Assume that households are the ultimate owners of the shares held by institutions then their losses would approach $1.4 trillion • The share holdings of Chinese households need to be put into perspective of overall household wealth 19 On China’s economy Consumer Spending • Chinese households hold the majority of their financial wealth in the form of bank deposits In short, the recent nosedive in the Chinese stock market has imparted a decline in household net worth on the order of only percent or so • In sum, the recent swoon in the Chinese stock market may weaken, but not depress, growth in real consumer spending in China because stocks play a relatively minor role in the portfolios of many Chinese households Figure 20 On China’s econom y Consumer Spending • History provides some interesting insights The past two years is not the first episode of volatility in the Chinese stock market • Personal consumption expenditures (PCE) shows that the stock market swings during this recession period not appear to have had a major effect on Chinese consumer spending • Clearly, there are more important factors influencing growth in Chinese consumer spending than simply changes in share prices Figure 21 On China’s econom y Investment Spending • The sharp decline in share prices in implies that the cost of capital for Chinese businesses has risen, which could exert a depressing effect on BFI (business fixed investment) spending • However, the ongoing stock market crash in China may not have as large a depressing effect in BFI spending in China • The equity market in China is relatively small in relation to the size of the overall financial system Although the run-up in share prices in China over the past two years would have pushed up the ratio, the larger point is that China is, and remains, an economy that is largely bank financed Figure 10 22 On China’s econom y Investment Spending • The PBoC has reduced its benchmark lending rate by 115 bps since November and further rate cuts seem likely • Banks appear to be reducing the interest rates they actually charge business and consumers more or less in line with the reduction in the PBoC’s policy rate • BFI spending in China may be less affected by the recent swoon in equity prices than many observers may naively assume Figure 11 23 Vietnam’s economy  It can be imagined that the first consequence was the massive losses and damages of the Vietnamese investors in the Chinese stock market However, the situation may only result in a very narrow range  Shift of investment portfolios coming from not only Chinese but also of other international investors Direct impacts towards the stock market of Vietnam  Vietnamese stock market might fall into their sights, but how many of them and how much capital would they allocate to the market was another story, depending directly on its relative attractiveness compared to other markets around the world SHCOMP 24 Historical data of SHCOMP and VNINDEX from 1/6 to 25/9 VNINDEX 25 Vietnam’s economy  Through trade channels between China and Vietnam  The slowdown of total demand caused negatively impact on Vietnam's export product to this country Indirect impacts  Weakening aggregate demand and decreasing economic growth would led to pressure to devaluate the Chinese currency In August 2015, Chinese currency devaluated by nearly percent As China is the biggest import partner of Vietnam, we can suffer from this change 26 Vietnam’s economy  The second indirect impact is on the stock market of Vietnam Attractiveness and profitability of stocks of corporations in these sectors, as a result, are likely to reduce, and their price will go down By contrast, stocks of companies which import and distribute, or companies buy materials from Chinese supplier Indirect impacts will have a good opportunities  The third indirect impact will be in a larger scope Obviously, Vietnam will be negatively affected by this change via international commerce and foreign investment as in the global economic crisis some years ago 27 THANK YOU FOR YOU ATTENTION! [...]... range  Shift of investment portfolios coming from not only Chinese but also of other international investors Direct impacts towards the stock market of Vietnam  Vietnamese stock market might fall into their sights, but how many of them and how much capital would they allocate to the market was another story, depending directly on its relative attractiveness compared to other markets around the world... China is the biggest import partner of Vietnam, we can suffer from this change 26 Vietnam’s economy  The second indirect impact is on the stock market of Vietnam Attractiveness and profitability of stocks of corporations in these sectors, as a result, are likely to reduce, and their price will go down By contrast, stocks of companies which import and distribute, or companies buy materials from Chinese. .. in the form of bank deposits In short, the recent nosedive in the Chinese stock market has imparted a decline in household net worth on the order of only 3 percent or so • In sum, the recent swoon in the Chinese stock market may weaken, but not depress, growth in real consumer spending in China because stocks play a relatively minor role in the portfolios of many Chinese households Figure 8 20 On China’s... who later sold shares to save their money 15 Chinese government’s responses  June 24: the State Council released a draft proposal to relax the maximum loanto-deposit ratio, currently at 75 percent  June 27: the People’s Bank of China stepped in to stop a sell-off in Chinese stock markets  June 29: the Ministry of Human Resources and Social Security and the Ministry of Finance published draft regulations... billion since market peak on June 12 • Assume that households are the ultimate owners of the shares held by institutions then their losses would approach $1.4 trillion • The share holdings of Chinese households need to be put into perspective of overall household wealth 19 On China’s economy Consumer Spending • Chinese households hold the majority of their financial wealth in the form of bank deposits... charge business and consumers more or less in line with the reduction in the PBoC’s policy rate • BFI spending in China may be less affected by the recent swoon in equity prices than many observers may naively assume Figure 11 23 Vietnam’s economy  It can be imagined that the first consequence was the massive losses and damages of the Vietnamese investors in the Chinese stock market However, the situation... Spending • The sharp decline in share prices in implies that the cost of capital for Chinese businesses has risen, which could exert a depressing effect on BFI (business fixed investment) spending • However, the ongoing stock market crash in China may not have as large a depressing effect in BFI spending in China • The equity market in China is relatively small in relation to the size of the overall... Historical data of SHCOMP and VNINDEX from 1/6 to 25/9 VNINDEX 25 Vietnam’s economy  Through trade channels between China and Vietnam  The slowdown of total demand caused negatively impact on Vietnam's export product to this country Indirect impacts  Weakening aggregate demand and decreasing economic growth would led to pressure to devaluate the Chinese currency In August 2015, Chinese currency... History provides some interesting insights The past two years is not the first episode of volatility in the Chinese stock market • Personal consumption expenditures (PCE) shows that the stock market swings during this recession period do not appear to have had a major effect on Chinese consumer spending • Clearly, there are more important factors influencing growth in Chinese consumer spending than simply... invest in stocks, funds, private equities, and other stock- related products 16 Chinese government’s responses  July 1: the CSRC (China Securities Regulatory Commission) allowed investors to use homes and other real assets as collateral to borrow money to purchase stocks  July 4: 21 brokerages set up a fund worth about $19 billion to buy shares  July 5: the CSRC said the PBOC will “uphold market stability”