CHINESE STOCK MARKET TURBULENCE 2015 2016 AND ITS IMPACT ON GLOBAL ECONOMY

FOREIGN TRADE UNIVERSITY INTENATIONAL ECONOMICS FACULTY MIDTERM ESSAY TOPIC: CHINESE STOCK MARKET TURBULENCE 20152016 AND ITS IMPACT ON GLOBAL ECONOMY Class: TCHE Group Lecturer: Assoc. Prof. Mai Thu Hien Hà Nội, 032019 MEMBERS OF GROUP STT NAME STUDENT ID 1 2 3 4 5   Table of Contents: I. Introduction 4 1.1. Rationale of research: 4 1.2. Research objectives: 4 1.3. Research methodology: 4 II. Content 5 2.1. Chapter 1: The turbulence of Chinese stock market 5 2.1.1. Literature Review 5 2.1.2. Reasons lead to Chinese stock market turbulence 5 • Background 5 2.1.3. How the incident affected Chinese domestic economy 10 2.2. Chapter 2: The turbulence impacts on global economy 18 2.2.1. Overview of the global economy from 2015 to 2016 18 2.2.2. Lesson for Vietnam 21 III. Conclusion 23 IV. Reference 24   I. Introduction 1.1. Rationale of research: The aim of this research is to analyze the information transfer in Chinese stock market around the crash of 20152016, and to reveal the impacts of this crash on the interactions between sectors. To the best of our knowledge, this question has not been studied systematically in the existing literature. 1.2. Research objectives: After decades of rapid growth, China has become the world’s second largest economy. It plays an important role in global trade. However, its stock market has displayed poor performance since the US subprime crisis. Under the background of deepening economic reform, the Chinese stock market began to boom around July 2014. Tens of millions of new investors entered the market. The great majority of them were retail investors, which tended to exhibit herd behavior. Moreover, many of these novice investors engaged in leveraged trading through various channels, for example margin financing of brokerages, shadow banking, or greymarket (overthecounter, OTC) margin lenders. Huge amounts of borrowed money flooded into the market. The Shanghai stock exchange composite index (SSECI) soared from 2050.38 on 1 July 2014, to a peak of 5166.35 on 12 June 2015. It increased about 152% in just one year. However, after the peak, the market plunged drastically. From late June to late August of 2015, the SSECI declined about 40%. It was one of the biggest falls in global stock market history. In order to stabilize the market, the Chinese government took a series of actions, including organizing statebacked financial firms collectively called the “national team” to buy stocks directly, banning short sales, stopping new initial public offerings, etc. Through these efforts, the market turbulence ended in February 2016. This crash brought heavy losses to Chinese investors and the economy. Market capitalization up to trillions of US dollars evaporated. It also impacted the world markets. 1.3. Research methodology: Analyzing information transfer is one of the fundamental subjects for complex system studies. It characterizes the interactions between components and provides important insights into the structure and dynamics of the system. This issue attracts many researchers from different fields, for instance neuroscience, physics, climatology, and zoology, etc.   II. Content 2.1. Chapter 1: The turbulence of Chinese stock market 2.1.1. Literature Review China is the world’s largest investor and greatest contributor to global economic growth by wide margins, and will remain so for many years. The efficiency of its financial system in allocating capital to investment will be important to sustain this growth. This paper shows that China’s stock market has a crucial role to play. Since the reforms of the last decade, China’s stock market has become as informative about future corporate profits as in the US. Moreover, though it is a segmented market, Chinese investors price risk and other stock characteristics remarkably like investors in other large economies. They pay up for large stocks, growth stocks, and long shots, and they discount for illiquidity and market risk. China’s stock market no longer deserves its reputation as a casino. In addition, the trend of stock price informativeness over the last two decades is highly correlated with that of corporate investment efficiency. China’s stock market appears to be aggregating diffuse information and generating useful signals for managers. On the buy side, because of its low correlation with other stock markets and high average returns, China’s stock market offers high alpha to diversified global investors who can access it. Yet this high alpha amounts to an inflated cost of equity capital, constraining the investment of China’s smaller, more profitable enterprises. Further reforms that open this market to global investors and improve stock price informativeness will be important to increase China’s investment efficiency and fuel its continued economic growth. Finally, we interpret the stock market’s recent gyrations through the lens of this research, arguing that its postcrisis lag was a rational downward adjustment to competition from the rapidly expanding shadow banking sector, and its enormous rally last year is a cheer for the roll out of deposit insurance and other Third Plenum reforms. More than ever, China’s stock market is a crucial counterpart to its extraordinary, relationshipdriven, but opaque banking sector. China’s stock market may now be the world’s most important crystal ball. 2.1.2. Reasons lead to Chinese stock market turbulence • Background Following a period of closure during the early history of the Peoples Republic of China, the modern stock market in China reemerged in the early 1990s with the reopening of the Shanghai Stock Exchange, and founding of the Shenzhen Security Exchange. By 2000, the Chinese stock market had over 1,000 listed companies, worth a market capitalization of nearly a third of China’s overall gross domestic product (GDP), and by the end of 1998, investors had opened nearly 40 million investment accounts. As more companies went public, investors rushed to the Shanghai and Shenzhen exchanges. The Chinese stock market and economy grew quickly, and by 2012, the number of listed companies between the Shanghai and Shenzhen Securities Exchanges had risen to over 2,400, worth a market capitalization of nearly 50% of China’s real GDP, and included over 200 million active stock and mutual fund accounts. Chinas economic growth, however, was stunted by the 2008 global recession and its aftershocks. The Chinese government responded to 2008 recession with a stimulus package that would draw resources from both the public and private sectors in order to fund an unprecedented infrastructure build. Growth following the stimulus package was rapid from 2009 to 2011, real GDP growth in China grew at approximately 9.6%, though in the two years that followed, real GDP growth fell to 7.7%. Seeing the opportunity for a nationwide reinvestment into the economy through the stock market, the government developed a campaign that would entice everyday citizens to trade – it was referred to as Zhongguomeng, which translates to the Chinese Dream. First conceived and pushed by the President of China, Xi Jinping, the ‘dream’ was one of overall economic prosperity and an elevated international status. The trading population that developed in China differed in important ways from those elsewhere in the world. In China, the stock market trading activity is dominated by individual investors (close to 85%) – also known as ‘retail investors.’ Indicative of the sheer size of investor inflow into the markets, after several months of a bull market developing in China, more than 30 million new accounts were opened by retail investors in the first 5 months of 2015, according to data from the China’s Securities Depository and Clearing Corp. And while a larger, more active investing population generally means greater market capitalization, many of these new traders were inexperienced and easily manipulated by the buying frenzy, with nearly two thirds having never entered or graduated high school, according to a survey by China’s Southwestern University of Finance and Economics. As a result, momentum and rumors among the traders carried more weight than reason when it came to investing decisions, creating a trend of impulsive buying and overvaluation in the market. Leading up to the crash, in an attempt to free up additional money for trading, the China Securities Regulatory Commission (CSRC), responsible for proposing and enforcing securities laws, had loosened several related financial regulations. Prior to significant policy reform in 2010, the act of selling short – essentially, borrowing and selling stock with the belief that its price will fall – and trading on margin – trading with debt – were strictly prohibited in China. However, in March 2010, China implemented a testing phase for their stock exchange in which 90 selected companies were authorized to be sold short and traded on margin. This list was expanded over time, with over 280 companies being given the same authorization in late 2011. Shortly thereafter, the CSRC implemented a total policy shift which legalized both practices across the entire stock market. These regulation changes led to significant increases in borrowing for the purpose of trading, and short selling became the most popular investing strategy among traders. From 2010, when the changes were implemented, to 2012, average daily short turnover increased from 0.01% to 0.73%, and average daily margin purchase turnover increased from 0.78% to 5.15%. As a result, the Chinese market was being flooded with debtfunded trades and risky short selling plays. To make matters worse, the CSRC also became a regulatory bystander, refusing to take action that would upset the political and social stability of the time. Instead of delisting public companies that failed to perform for three consecutive quarters – a wellknown regulation in China – the CSRC would regularly let those companies slide for fear of upsetting the shareholders. This added to the flames of bad investing, allowing investors to continue pouring their money into companies that were underperforming and overvaluing shares that were essentially worthless on the books. • The cause Before reaching the ceiling on June 12, 2015, China’s stock market had ballooned about 150 percent in a year. The Chinese stock market crash began with the popping of the stock market bubble in midJune (starting on June 15, 2015). A third of the value of Ashares on the Shanghai Stock Exchange was lost within one month following the event. The Bank of England gave a frightening illustration of the enormous scale of the Chinese stock market rout, stating that the 2.6 trillion wiped off the Shanghai and Shenzhen Composite indexes in the initial 22day summer market rout is equivalent to the entire GDP of the UK in 2013, and amounts to seven and a half times the nominal value of outstanding Greek government debt. The carnage did not end in 22 days. Major (more severe) aftershocks occurred around July 27 (the Shanghai Composite Index fell by 8.5 percent, marking the largest fall since 2007) and again on August 24 “Black Monday” (8.5% fall in the Shanghai Composite Index) and August 25 “Black Tuesday” (another 7.6% fall). As of this writing, as can be seen in the following charts 1 and 2, the market seems to have calmed down with the index hovering around 2900 points (compared to 5178 peaks reached on June 12). However, this relative quietness, along with shares languishing in their lows and low trading volume and volatility, shows that the market is now left in the doldrums, and is likely to be stuck for a long time. Altogether, last summer’s herd stampede has practically erased the Chinese stock market gains in the first half year of 2015 completely. The source of any stock market crash may vary over specific circumstances, but one general reason remains generically the same: What goes up must come down. Thus we need to understand what caused the bubble in China’s stock market to form (buying frenzy) and pop (panic selloff). Between June 2014 and June 2015, China’s Shanghai Composite index rose by 150 percent. There was a strong sign that the seemingly bull market was actually entering the bubble territory as it is not justified or consistent with the economic fundamentals. The value of many shares rose at a rate and speed that made little sense. Many companies with meager earnings (or even losses) were seeing a meteoric rise in their shares. Meanwhile, the country’s broader economy was going the other way, with economic growth slowing down significantly (the economic growth rate has fallen from doubledigit figure in previous years to 7%, dubbed the “New Normal” by XiLi leadership.) In other words, in a healthy market, stock market booming usually signals an economic expansion. But the Chinese economic growth has been declining in the past few years and was not expected to go back to the brisk growth in the near future. Therefore, the 20142015 runup was clearly a bubble without support from the real economy. A big reason for the stock market rally was that a lot of ordinary Chinese people began investing in the stock market for the first time. More than 40 million new stock accounts were opened between June 2014 and May 2015. Unlike other major stock markets, which are dominated by professional money managers, retail investors account for around 85 percent of China’s trade. “A majority of the new investors in China’s market don’t have a high school education (6% are illiterate). There are now more retail investors in the Chinese stock market (90 million) then there are members of China’s Communist Party (88 million)”, as reported by Reuters. These inexperienced retail investors dramatically increased the volatility of the market leading to much greater fluctuations in the stock market than would otherwise be the case. This is because of they, unlike institutional investors who are professionals engaging in longterm investments on the basis of rational market analysis and projections, typically engage in shortterm speculations based on hearsays, rumors, and irrational projections. As a result, they tend to exhibit herd behavior causing much greater share price fluctuations than would otherwise be the case. Worse yet, many of these novice investors were making highly leveraged purchases with borrowed money. This practice, known as “trading on margin”, used to be prohibited in China. But then the Chinese government lifted the prohibition changing policy to strictly regulate the practice of margin trading. Over the past five years, the Chinese authorities have gradually relaxed the restrictions on margin trading. The newly relaxed rules still included an important safeguard, though: a 2to1 margin requirement said that only half of invested funds could be borrowed. The investor needed to put up the rest of the funds herself. There were also restrictions on which stocks you could buy and how long the money could be borrowed―rules designed to prevent speculative mania from getting out of hand. However, people also found a number of creative ways to evade these requirements. As a result, many people have been able to make even riskier bets than the official rules allowed. The borrowed money flooded into the Chinese stock market between June 2014 and June 2015, helping to push stock prices up 150 percent. During this period, the amount of officially sanctioned margin trading in the Chinese stock market ballooned from 403 billion yuan to 2.2 trillion yuan. Experts estimated that another 2 trillion yuan or so of borrowed money has flowed into the markets using vehicles designed to skirt official limits on margin trading. So, margin trading―and margin debt―skyrocketed, and a perfect storm was forming. The surge in stock prices alarmed Chinese authorities. Earlier this year they took steps to rein in margin trading and other forms of leveraged investing. In January, they raised the minimum amount of cash needed to trade on margin. They also punished a dozen companies for failing to enforce rules on margin trades. In April the government cracked down on vehicles designed to skirt the margin trading rules. The government’s toughest measures came on Friday, June 12, when China’s securities regulator announced a new limit on the total amount of margin lending stock brokers could do, while also reiterating the curbs on illicit margin trading. Looking back, this announcement acted as the last straw and triggered the market to fall on the following Monday. When the market nosedived, investors faced margin calls on their stocks and many were forced to sell off shares in droves, precipitating the crash further. Now the bubble has popped. So on the surface, it looks as though the retail investors are to be blamed for their own irrational exuberance that caused the crash. But beneath the surface, the Chinese government is not without fault (if not to be faulted as the culprit, at least to be blamed for mismanagement). The crash also reflects the underlying structural problems of the economy. In the recent past years (especially since the 2008 great recession), Beginning in the early 1990s China has achieved two decades of remarkable doubledigit growth. But it is increasingly clear that this export and investmentled growth is not sustainable without substantial restructuring and rebalancing of the economy. Then came the 2008 great recession, causing global demand to fall precipitously and China could no longer keep its growth going through exports. And its own citizens weren’t consuming enough to create the demand necessary to keep the growth engine revving either. The Chinese government’s answer was to mount a massive stimulation package, using monetary policy, stateowned banks, local governments, and other tools under its control to push internal investment. The result was a massive buildup in factories, highways, airports, real estate, and much more. Some of these investments were wise. Many weren’t. China has become famous for its profusion of empty stadiums, skyscrapers, and ghost cities. The result is a lot of overcapacities and many stateowned enterprises and local governments are ridden with enormous bad debt. This is part of why the Chinese government encouraged the stock market boom. As said by an analyst, “The Chinese government basically comes up with this plan. They see they have these heavily indebted companies that need to raise money to clean up their balance sheets. They realize there are these huge savings in China that can be put into the stock market. So they begin talking up the stock market and they make it easier to use margin debt. And margin debt exploded.” In a sense, the stock market boom was caused by government’s strategy to solve the debt problem of zombie stateowned enterprises and the government’s (China Securities Regulatory Commission) facilitation of margin trading by relaxing the previous restrictions. This coincided with the timing when the Chinese property market went down, and people who were putting their money in property began looking elsewhere for better returns. Lots of novice investors got into the stock market because the Communist Party, in word and deed, was pushing them into a debtfueled binge in the stock market. State media also played a prominent role in drumming up the stock market bubble in the first place. The official Xinhua News Agency published eight articles on the stock market in a space of three days in early September 2014 to solicit investors joining the historic gambling, and in March 2015, the CCP’s mouthpiece People’s Daily issued a threearticle series, “A Share Volatility Is Part of a Slow Bull; Index Expected to Challenge 4000.” As the Economist puts it, “The government got all of the corporations in China that were going broke to go public. Then, they got the average Chinese citizen to invest.” and “Officials are seen to have promised the population a bull market, only to lure them into a bear trap” (quoted by James Richards in his blog posted on August 10, 2015, at Daily Reckoning.com). 2.1.3. How the incident affected Chinese domestic economy a. The Shanghai stock market crash The Chinese stock market turbulence began with the popping of the stock market bubble on 12 June 2015 and ended in early February 2016. In August 2015 the Shanghai Composite Index (SCI) fell by more than 20 %. The losses, concentrated at the end of the month, represented the second significant market drop in less than two months, following a similar plunge in July. The rout has been dramatic, but so had the gains; the recent period of financial turbulence in China has come of the heels of remarkable increases: the Shanghai stock market grew by more than 150 % between June 2014 and June 2015. In this summer’s crash, Chinese investors have lost about EUR 5 trillion – a sum higher than China’s entire market capitalisation in 2012. In the weeks since the SCI reached its 12 June peak, the index has lost more than 40 % of its capitalisation. The smaller and technologicallyoriented Shenzhen Stock Exchange (STE) has suffered even higher losses, nullifying all its 2015 gains Shanghai composite index (201415) Yet as dramatic as the drop has been, the effects of the recent financial crash on the Chinese economy have been relatively limited. This is largely due to the nature of investors exposed to losses: in China, stocks account for less than 15 % of household financial assets. Just 5 to 10 % of Chinese citizens are in fact exposed to such market fluctuations. By comparison, 55 % of US citizens have savings invested in stocks. Moreover, most Chinese investors belong to the middle and upper classes and have benefitted from significant gains made in the hectic months that preceded the burst: the bubble has burst, but valuations still remain above their levels of one year ago. Coupled with a more general slowdown in the Chinese economy – whose growth rates are projected to hover around 7 % over the next five years, lower that the doubledigit growth recorded for about two decades – the stock markets’ disturbance has greatly reduced foreign investors’ confidence in China’s model of development. The crash has also cast serious doubt on Beijing’s management of the financial markets. Even more disconcerting than the recent stock market crisis, however, is the fundamental crisis of the Chinese economic model. This issue deserves a careful analysis to understand the longstanding implications on global economic growth. • Chinese RMB On 11 August, two months after the turbulence, the Peoples Bank of China devalued the RMB by 1.86 percent to CN¥6.2298 per US dollar. A lower renminbi (RMB) makes China’s exports more competitive in foreign markets, offsetting part of the surge in the country’s bluecollar wages over the last decade; and it makes foreign companies, houses and other overseas investments seem more expensive. On 14 August, the central bank devalued it again to CN¥6.3975 per US dollar. In August there was speculation about the causes of the devaluation of the yuan and the changes in the Chinese economy in 2015, including the growth in its services sector rather than heavy industry. By midJanuary 2016, an article in The Economist argued that the strains on the yuan indicated a problem with Chinas politics. However, a spokesperson for the International Energy Agency(IEA) argued that the risk was overplayed. During the drastic selloff on 7 January 2016 Chinas central bank, the People’s Bank of China set the official midpoint rate on RMB to its lowest level since March 2011—at CN¥6.5646 per US dollar. On 8 October 2015 China launched a new clearing system developed by the People’s Bank of China (PBOC) CrossBorder InterBank Payments System (CIPS) to settle crossborder RMB transactions and intended to increase global usage of the Chinese currency, by cutting transaction costs and processing times and removing one of the biggest hurdles to internationalizing the yuan. Because of the stock market turbulence, the launch had been delayed and CIPS was watered down offering, a complementary network for settling traderelated deals in the Chinese currency to a current patchwork of Chinese clearing banks around the world. By December 2015, the RMB was still the fifth most used global payments currency and the second most used currency for trade finance with 27 per cent of Chinas goods invoiced in RMB compared to 19 per cent in 2014. In December China was the worlds largest exporter. By October 2016, the Renminbi will be added to the special drawing rights currency basket, the foreign exchange reserve assets defined and maintained by the International Monetary Fund, which includes the U.S. dollar, Euro, Japanese yen and pound sterling. The IMFs decision to add the RMB to the SDR, was crucial to global financial stability as it would encourage China to continue to be a responsible global citizen and liberalise its exchange rate, while intervening to ensure a gradual decline. • China’s PMI In August 2015, Caixin Media a closely watched gauge of nationwide manufacturing activity announced that the China Purchasing Managers Index (PMI) had declined to 51.5. This was the beginning of a decline that continued into December 2015 with the PMI falling below 50 anything below 50 indicates deceleration. PMIs are economic indicators derived from monthly surveys of companies purchasing managers and is produced by the financial information firm, Markit Group, which compiles the survey and conducts PMIs for over 30 countries worldwide. From 2010 to 2015 HSBC had sponsored Markits China PMI, but that relationship ended in June and Caixin stepped in. By 2016 the PMI was down for the fifth month indicating a cooling in manufacturing in China. Manufacturing activity is a key sign of economic performance. December was the tenth month in a row that manufacturing in China had contracted raising concerns that Chinas economy was not on steadier footing. It was seen as the most recent indication of slowing global economic growth. Since China is the worlds largest metal consumer and producer, and the world’s second largest economy, the China PMI is closely watched. This 2016 selling frenzy was fueled by the most recent private survey of factory activity, the December 2015 report by Caixin on Chinas Purchasing Managers Index (PMI) reading which showed that Chinas manufacturing activity had slowed again in December 2015 to a PMI reading of 48.2 with anything below 50 indicating deceleration. b. Chinese government’s reaction The Chinese government enacted many measures (more than 40 and counting) to stem the tide of the crash. Regulators limited short selling under threat of arrest. Large mutual funds and pension funds pledged to buy more stocks. The government stopped initial public offerings. The government also provided cash to brokers to buy shares, backed by centralbank cash. Staterun media continued to persuade its citizens to purchase more stocks. In addition, China Securities Regulatory Commission (CSRC) imposed a sixmonth ban on stockholders owning more than 5 percent of a companys stock from selling those stocks. Further, around 1300 total firms, representing 45 percent of the stock market, suspended the trading of stocks starting on July 8. The following is a chronological listing of all the different policy buttons China has pressed on its financial crisis console since stocks started unraveling after midJune June 27 1) China’s central bank, People’s Bank of China, cuts interests rate by 0.25%. June 30 2) Asset Management Association of China (AMAC) requests investors and fund managers to stay rational and not to panic. July 2 3) Brokers loosen margin financing requirements; the practice of lending to retail investors who use the money to trade shares. 4) State Council decides to suspend large public share offerings until Shanghai Composite Index of shares returns to 4500 level. 5) Police investigate three media outlets for spreading rumors and the government vows to impose heavy penalties for manipulation. Governmentrun news sources Xinhua and People’s Daily both publish articles calling for investors’ confidence. July 3 6) Margin financing: some brokers lower threshold and loosen policy again. 7) Crackdown on short selling and several brokers suspended the business. July 6 8) China Financial Futures Exchange (CFFEX) restricts index future trading. 9) China Securities Finance Corporation (CSFC) to use funds contributed by various brokers to buy exchange traded funds. Social Securities Fund (SSF) vows not to reduce existing equity positions in its portfolio. July 7 10) China Insurance Regulatory Commission (CIRC) allows insurers to invest more in bluechip stocks. July 8 11) PBOC vows to maintain market stability and avoid systematic financial risk. It will provide ample liquidity to CSFC via interbank lending, financial bond, pledged financing, and relending facilities. 12) CSFC grants credit to 21 brokers via pledged stocks to allow them to buy more equities. 13) CSFC invests in mid cap stocks via mutual funds. July 9 14) China Securities Regulatory Commission (CSRC) suspends reviews of share offerings. 15) China Banking Regulatory Commission (CBRC) allows banks to roll over matured loans pledged by stocks. 16) Minister of Public Security CSRC investigates “malicious” short selling activities. 17) CSFC says it will purchase mutual fund products to stabilize liquidity. July 13 18) CSRC probes trading system vendor Hundsun Tech for allowing illegal margin financing. 19) China tightens rules on futures trading. July 15 20) CSDC to extend business hours for major shareholders to increase their own companies’ stock holdings. July 16 21) CSRC demands brokers’ proprietary trading to maintain net purchase on daily basis and it will allow brokers equity investment to exceed risk limit during special period. July 17 22) CSFC receives RMB 1.3 trillion from 17 commercial banks. July 20 23) CSRC clarifies that government money will not be exiting the stock market. July 27 24) CSRC denies rumor that state buying has stopped. July 30 25) CSFC grants Rmb200 billion liquidity to five mutual funds. 26) CIRC urges insurers not to net sell equities in near future and demands daily report on equity holdings. 27) China Securities Depository and Clearing Co., Ltd. (CSDC) cuts fees. August 3 28) CSRC investigates electronic trading; 24 funds suspended for 3 months. 29) Shanghai Stock Exchange (SHEX) and Shenzhen Stock Exchange (SZEX) significantly raise commission to discourage program trading. 30) Policy banks announce RMB 1 trillion bonds to support infrastructure and construction in coming years. 31) Stock markets change settlement dates to discourage speculative shortselling and to mitigate intraday volatility. August 7 32) Speculation that CSFC has war chest of RMB3 trillion to invest in stock market. 33) CSRC vows to crack down on margin financing and illegal short selling. August 11 34) PBOC adjusts currency fix, devaluing by 3%. Four out of five of the CSFCinvested mutual funds have started investing in Ashare stock market. August 14 35) CSFC publishes its exit plan: Part of its stock holding will be transferred to Huijin; CSFC says it won’t exit the stock market over the next few years. 36) Ministry of Finance (MOF) relaxes rules for stateowned venture capital funds. August 18 37) CSRC investigates HOMS and Hithink Royal flush for illegal lending to finance retail stock purchases (margin financing). August 21 38) CSRC suspends approval of 191 mutual funds and seeks to encourage more risktolerant investors. August 23 39) State Council issues new pension fund investment guidelines, allowing stock investment at 30% of net assets. August 25 40) Chinese central bank PBOC cuts interest rates by 0.25%. September 7 41) Ministry of Finance (MOF) said it would remove personal income tax on dividends for shareholders who hold stocks for more than a year. October 24 42) Chinese central bank PBOC cuts interest rates by 0.25%. Despite the myriad of measures mentioned above that were taken by China’s policymakers in their attempt to “rescue” the market, the authorities have failed to prop up the stock market prices. By the end of August, it appears that the government has abandoned initial plans to boost stocks up to their selfproclaimed mandate level of 4500 points. While it may be still too early to give an “F” grade to the Chinese government’s performance in this case study of public crisis management, suffice to say that up to now they have not effectively managed to solve the problem. Most of those measures mentioned above have not really worked. Some of these policies such as the interest rate cuts, loosening rules on pension fund investing, and banning short selling look more like the result of hastily formed (out of panic) rather than carefully thought out policies. There’s only one thing that seems to have a real effect: the direct stock purchases through the government’s socalled “national team”. The “national team” is the collective name given to statebacked and statedirected Chinese financial firms who have been ordered to directly buy stocks in an attempt to boost investor confidence. As the name suggests, these firms work in tandem to push share prices higher. So far the “national team” has not been successful in pushing share prices higher to the targeted level of 4500 points, but at least it has been widely credited for helping to prevent even greater market losses. The working of the “national team” is evident in many intraday transaction activities: when the market starts to decline “abnormally” showing a sign of wild selloff, there will be mysterious surge of large volume purchases hinting that the “national team” is entering the market. This “national team” staged rally typically occurred in the last hour of trading before the markets close. Just how much money has the “national team” put towards stocks over the past three months? According to Goldman Sachs analysts, it’s a nearunbelievable 1.5 trillion yuan, or US236 billion. Given that the market capitalization of Amazon is around US236 billion, this means that China has spent the entire Amazon market capitalization to prop up its stock market, an extremely expensive policymaking on the part of the Chinese government. Costeffectiveness issue of policymaking aside, the market rescue actions also have profound implications. Above all, the incessant meddling in the nation’s stock market, which borders on outright market manipulation, is an irony of trying to save the market but ending up with harming (if not killing) the market. The authorities used several draconian tactics such as banning some investors from selling, investigating those who still choose to sell and arresting those who have sold shares “maliciously”, and even detaining and forcing the journalist to apologize on state television for reporting (“spreading the rumor”) that CSRC was preparing an exit plan from outright share purchases. These tactics may prevent market meltdown in the short term, but will chill the market in the long term, and also have the side effect of moral hazard and market distortion. Some bold scholars inside China also criticize government’s handling of this matter. For example, Yongding Yu, the Director of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences, said “The current stock market unrest does not constitute a systematic crisis, and so the government should not intervene. What is happening to China’s stock market now is not panic selling but a reevaluation of the prices. It is inevitable that there is some overshooting in this process, but the government should not take the place of the market and put prices on stocks” (The New York Times, Sept. 14, 2015). While the Chinese government initially appeared reluctant to intervene in the financial turmoil, Beijing ultimately responded to the stock collapse with a set of exceptional measures, intervening in the operations of the country’s stock exchanges. The governments measures included compulsory orders that brokers buy shares, as well as a prohibition that shareholders (in particular SOEs state owned enterprises) sell. Other measures included a suspension of initial public offerings and a further relaxation of the rules governing insurance companies’ stock purchases. The Chinese Central Bank also pledged to lend 260 billion renminbi (about EUR 36 billion) to major brokerage firms via the China Securities Corporation, thereby avoiding a scenario in which the firms ran out of liquidity. In addition to all these initiatives, most of the companies listed on the two Chinese stock exchanges were either suspended or put under strict control by the Chinese financial authorities Shanghai Stock Exchange suspensions (JuneJuly 2015) China’s stock regulator also introduced the ‘Announcement 18’, threatening ‘severe punishment’ for any senior manager or major shareholder (one holding a stake of 5 % or more) selling shares of a listed company during a period of six months. With a single announcement, trillions of RMB in assets belonging to some of China’s wealthiest investors were frozen for half a year. The securities regulator announced that there were no plans for how and when major shareholders could resume selling their shares, stating instead that the rules for future selling would be outlined in ‘further decrees’. It is still unclear when the Chinese government will scrap these exceptional measures. Some have already been lifted, but most exceptional measures remain in place at the time of writing. In the medium and long term, they may well disappoint major Chinese and foreign shareholders and reduce the liquidity available to finance private sector investments. If the measures are not rapidly terminated, they may also effectively delay urgent structural reforms and jeopardise growth over the long term. Another government intervention has involved China’s currency. On 11 August 2015, the People’s Bank of China (PBOC) announced its decision to liberalise the RMB reference rate, traditionally set by the central bank. The move triggered an immediate, significant depreciation of the Chinese currency, suggesting Beijing’s intention was to depress the currency to boost exports and support the domestic economy. This move did not, however, please international markets, which perceived the decision as a sign of weakness. Exchange rate USDCNY 2010 2015 In the end, according to 19 January 2016 articles in the Xinhua News Agency, the official press agency of the Peoples Republic of China, China reported a 6.9 percent GDP growth rate for 2015 and an economic volume of over ten trillion U.S. dollars. Forbes journalist argues that the stock market crash does not indicate a blowout of the Chinese physical economy. China is shifting from a focus on manufacturing to service industries and while it has slowed down, it is still growing by 5%. After this last turbulence, as of January 2017 the Shanghai Composite Index has been stable around 3,000 points, 50% less than before the bubble popped. 2.2. Chapter 2: The turbulence impacts on global economy 2.2.1. Overview of the global economy from 2015 to 2016 • The world economy stumbled in 2015 The world gross product is projected to grow by a mere 2.4 per cent in 2015, a significant downward revision from the 2.8 per cent forecast in the World Economic Situation and Prospects as of mid2015. More than seven years after the global financial crisis, policymakers around the world still face enormous challenges in stimulating investment and reviving global growth. The world economy has been held back by several major headwinds: persistent macroeconomic uncertainties and volatility; low commodity prices and declining trade flows; rising volatility in exchange rates and capital flows; stagnant investment and diminishing productivity growth; and a continued disconnect between finance and real sector activities. A modest improvement is expected to start next year, with global growth reaching 2.9 per cent and 3.2 per cent in 2016 and 2017, respectively. The anticipated timing and pace of normalization of the United States monetary policy stance is expected to reduce some policy uncertainties, while preventing excessive volatility in exchange rates and asset prices. While the normalization will eventually lead to higher borrowing costs, rising interest rates should encourage firms to increase investments in the short run. The improvement in global growth is also predicated on easing of downward pressures on commodity prices, which should encourage new investments and lift growth, particularly in commoditydependent economies. • The developed economies are expected to contribute more to global growth Growth in developed economies is expected to continue gaining momentum in 2016, surpassing 2 per cent for the first time since 2010. In developing and transition economies, growth slowed in 2015 to its weakest pace since the global financial crisis amid sharply lower commodity prices, large capital outflows and increased financial market volatility. Growth is projected to reach 4.3 per cent in 2016 and 4.8 per cent in 2017, up from an estimated 3.8 per cent in 2015. Despite the slowdown in China, East and South Asia will remain the world’s fastestgrowing regions, with many of the region’s commodityimporting economies benefiting from low prices for oil, metals and food. GDP growth in the least developed countries is expected to rebound from 4.5 per cent in 2015 to 5.6 per cent growth in 2016, but will fall short of the Sustainable Development Goal target of at least 7 per cent GDP growth per annum in the near term. While developing countries have been the locomotive of global growth since the financial crisis, the developed economies, particularly the United States of America, are expected to contribute more to global growth during the forecast period. • Low inflation persists in developed economies, while volatility of inflation and growth remains high Amid persistent output gaps, declining commodity prices and weak aggregate demand, global inflation is at its lowest level since 2009. In developedmarket economies, annual inflation in 2015 is expected to average just 0.3 per cent. Ultraloose monetary conditions have so far prevented deflation from becoming entrenched in the developed countries. However, low inflation has been associated with higher levels of volatility in inflation, growth, investment and consumption in a majority of large developed and developing countries and economies in transition. Significant currency depreciations have offset the disinflationary pressures in several developing economies. The Brazilian real and the Russian rouble have recorded large depreciations, and both countries remain mired in severe economic downturns, accompanied by elevated inflation. • The economic slowdown hurts labor markets Unemployment is on the rise in many developing and transition economies, especially in South America, while it remains stubbornly high in countries such as South Africa. At the same time, labor force participation rates, especially among women and youth, have been declining, and job insecurity has become more widespread, amid a shift from salaried work to selfemployment. The declining employment intensity of growth in many countries, coupled with stagnant real wages, poses a challenge to promoting inclusive and sustainable economic growth, employment and decent work for all. • Investment experienced sharp and broadbased deceleration Growth rates of fixed capital formation have registered sharp declines in a majority of developed and developing economies since 2014, including negative investment growth in nine economies. The weak aggregate demand, falling commodity prices and persistent policy uncertainties constrained investment growth during 20142015. A modest pickup in investment is expected, provided commodity prices do not slide down further and the anticipated normalization of the United States monetary stance reduces policy uncertainties. However, coordinated efforts are still needed at national and international levels to ensure that financial sectors effectively intermediate savings and liquidity and also stimulate fixed investments. • Reducing poverty and emission levels will require concerted policy efforts The broad slowdown in economic growth in many developing economies and generally weak wage growth will restrain progress in poverty reduction in the near term. Further progress in poverty reduction will rely heavily on policies to reduce inequality, such as investment in education, health and infrastructure, and stronger social safety nets. Global energyrelated carbon emissions experienced no growth in 2014 for the first time in 20 years, with the exception of 2009 when the global economy contracted, suggesting that a delinking of economic growth and carbon emission growth is possible with appropriate policies and adequate investment. Lowcarbon energy sources now account for over 50 per cent of new energy consumption worldwide. • The commodity price decline has had significant adverse effects on trade flows and public finance The termsoftrade of commodity exporters have deteriorated significantly, limiting their ability to demand goods and services from the rest of the world. Currentaccount balances of commodity exporters have deteriorated, and given the net outflow of capital from many commoditydependent economies, countries have been forced to either draw down international reserves or cut back imports. This has had second order effects on trade in noncommodityexporting economies, compounding longerterm trends, such as the slower expansion of global value chains and limited progress in multilateral trade negotiations, which weigh on the volume of global trade. The commodity price declines and exchangerate realignments have also had a significant impact on fiscal balances, particularly in the commoditydependent developing and transition economies. The sharp decline in the headline value of global trade, however, is largely attributable to the deterioration of commodity prices and appreciation of the dollar. Trade volumes have recorded a more moderate deceleration, reflecting a widening divergence between the value and volume of global trade. • Financial market volatility has increased significantly The steady decline in global commodity prices, including a dramatic drop in the oil price, reflects a combination of ample supply and slowing demand. Demand from China plays a key role in price swings for metals, in particular, as the country accounts for almost half of global metal consumption. The combination of commodity price adjustments and capital outflows has been associated with sharp exchangerate realignments and heightened volatility in foreignexchange markets. • Strengthening the multilateral trading system will allow countries to better exploit the benefits of trade International trade is an important determinant of global growth and development. At the global level, there remains considerable untapped potential to exploit the benefits of international trade. A universal, nondiscriminatory multilateral trading system is a central element for harvesting this potential. However, the Doha Round has made limited progress in the last fifteen years. At the same time, there has been an increasing prevalence of newgeneration regional trade agreements (RTAs). MegaRTAs can diminish incentives for universal negotiations, and may have adverse effects on countries not included in the RTA, especially developing countries. The TransPacific Partnership (TPP) is the first megaRTA completed, and creates a market of 800 million people with over 40 per cent of the world gross product. NonTPP members, however, may be impacted by diversion of trade and investment towards TPP member countries. This highlights the importance of enhancing coherence between RTAs and the multilateral trading system so they can support and sustain an enabling development environment. 2.2.2. Lesson for Vietnam • Impact on Vietnam The international context fluctuates with the decline of the Chinese stock market and some stock markets around the world, combined with measures to adjust the VNDUSD exchange rate in the country (after China devalued the yuan continuously). has a strong impact on Vietnam stock market. The VNIndex has plummeted with a decrease of 15% in August after rising 13.8% in the first 7 months of 2015. After falling 29.37 points (5.28%) in the day session. August 24 (the strongest decline since May 8, 2014 the time of the Rig 981 event), the VNIndex closed at 526.93 points, down 17% from the peak of The first 8 months of 2015 (reached on July 14) and decreased by 3.4% compared to the end of 2014. The HnxIndex also dropped by 14% in August after rising 2.6% in the first 7 months. in 2015 and closed at 73, 09 points on August 24, 2015 (down 18% from the peak of the first 8 months of 2015 set on July 6, 2015). Liquidity on the stock market in August decreased compared to July, but tended to increase when the VNIndex and HNXIndex declined, indicating a strong demand for low prices. On average, there are 149 million shares on the HSX and HNX on the two exchanges, down nearly 20% compared to July. Market capitalization (Ho Chi Minh Stock Exchange (HSX) and Hanoi Stock Exchange (HNX) fell to VND 1.15 million (as of August 24, 2015, estimated to reach 31% of GDP in 2014), down nearly 10% from July. The main reason leads to decline including developments in the domestic and international monetary market. Specifically: (i) Firstly, China devalued the domestic currency, leading some countries (including Vietnam) to adjust the exchange rate, which affected production enterprises and investors. The unfavorable domestic and international stock market situation also increased the ability of foreign investors to withdraw capital; (ii) Secondly, oil and gas stocks were heavily affected by the world oil price dropped the most since 2009; (iii) Thirdly, banking stocks also fell sharply after negative information about ImportExport Commercial Joint Stock Bank (Eximbank) and East Asia Commercial Joint Stock Bank. Positive factors such as lower gasoline prices or the issuance of Circular 1232015 TTBTC guiding the ownership of foreign investors in listed companies is not enough to support the market. However, the general assessment shows that fluctuations in the stock market in Vietnam in the recent time mainly stem from internal factors of the economy and psychological factors, rather than the direct impact from fluctuations. of the Chinese stock market. From an indirect perspective, the impact from the fluctuations of the Chinese stock market in Vietnam can be seen in the following aspects: Firstly, the volatility of the Chinese stock market may lead to a shift in the portfolios of Chinese investors and international investors on the Chinese stock market. Accordingly, a part of the investment capital flow in the Chinese stock market may shift to other stock markets, including Vietnam, in search of a safer alternative market and a relatively good growth potential. Research on foreign investment data on Vietnam stock market in the first 7 months of 2015 showed that foreign investors tend to be net buyers on Vietnam stock market (HSX and HNX) with a total value of VND 5,544 billion, of which, May and June had the highest net buying volume with the value of VND 1,394 billion and VND 1,532 billion respectively. Secondly, Chinas total demand declined due to the loss of assets on the Chinese stock market may affect VietnamChina trade (reducing Vietnams exports to China while increasing imports from China). In terms of aggregate demand, China is now a country with great consumption, thanks to its large population and high income in recent years. The asset value of investors holding Chinese stocks decline (over 30%) will affect the aggregate demand of this country, so the demand for Chinese imports from Vietnam may also decrease. The key export sectors of Vietnam to China such as agriculture, seafood, minerals and other materials will be affected sectors. In addition, with aggregate demand weakening while production capacity has been and continues to be surplus, On the one hand, China will seek ways to protect the domestic market before imported goods, on the other hand will make efforts to promote Chinese exports to other countries (including Vietnam) by many measures. In the context of Chinas export competitiveness increased after consecutive depreciation of the yuan, the decline in Chinese demand due to the loss of assets on the stock market will be factors that can contribute to the increase. trade deficit from China and Vietnam in 20152016. Thus, the impacts from fluctuations in the Chinese stock market to Vietnam can be seen both directly and indirectly, with positive and negative aspects. In order to exploit opportunities and to minimize negative impacts from fluctuations in the Chinese stock market to Vietnam, the following issues should be paid attention to: (i) Improve management and supervision capacity to ensure ensuring safe and healthy development of the market, protecting legitimate interests for investors; (ii) Strengthen supervision, inspection and inspection of securities companies and fund management companies; (iii) Expanding the market with many investors, increasing the participation of financial institutions and foreign investors; (iii) Enhancing supply, diversifying products in the market in accordance with investors needs; (iv) Diversify Vietnams export markets as well as Vietnams import markets to minimize negative impacts from Chinas aggregate demand decline; At the same time, restricting the import of nonessential goods from the Chinese market to limit the increase in trade deficit from China. • Lesson for Vietnam Chinas stock market collapsed is a valuable lesson for developing markets including Vietnam. The Chinese governments policy of monetary easing is basically aimed at supporting economic growth. However, the side effects leading to the excessive rise of the stock market have gone beyond the control of the government. This indicates that any risk can occur if there is a lack of coherence and synchronization in economic management. In addition, the lesson also showed the importance of institutional and foreign investors to the financial market in general and the stock market in particular. The collapse of the stock market has a large part of the investment movement which is a chain of a large number of individual and small investors with limited knowledge about economy and finance. On the positive side, the problems of the Chinese stock market are opportunities for Vietnams stock market when the capital withdrawn from China will shift to new markets. Especially in the context of Vietnam has emerged and caused much attention in the eyes of institutional and foreign investors. The macro economy is on a positive recovery, with more and more open reforms and changes to the world, including policies to increase the ownership rate of foreign investors in Vietnamese enterprises. Recent male. III. Conclusion The recent crisis plaguing Chinese stock markets has been dramatic, but has not – yet – completely burst of the bubble of valuations that could directly affect the country’s ‘real’ economy. The Chinese government has reacted quickly to the crisis, so far managing to avoid a fullblown financial crisis. The exceptional measures Beijing has deployed – including depreciation of the domestic currency in an attempt to boost declining export performance – would hardly be available in a fullfledged market economy. These measures are obviously limited in time and may be lifted relatively quickly if the situation in financial markets improves and China does not abandon its efforts to gradually enter the global financial system. Investors’ confidence in the growth and smooth operation of Chinese stock exchanges has, however, been shattered by recent turbulence. This is especially true for a less experienced group of private, middleclass savers who enthusiastically invested in the stock market over the last year. The current situation is also unfortunate as it has created expectations of further state intervention to support the economy. By freezing stocks and assets, the markets may also drain muchneeded liquidity from the real economy. Analysts do not agree on the likely outcome of the crash. Economist Nouriel Roubini has argued that ‘there is only a moderate chance of the stock market slump snowballing into a fullblown financial crisis. However, this scenario is not excluded by other analysts, who consider ‘there are reasons to believe that thisthe financial crisis could turn out to be a more fundamental cooling of China than previously thought. In any case, the recent financial crisis has overshadowed a certainty in the Chinese economy: a major slowdown. The engine that was able to produce doubledigit growth for decades seems to have been deactivated. Beijing’s ‘new normal’ strategy has not yet produced its intended effects, and new and deeper reforms are needed to bring the Chinese economy back on track. The crisis may also call into question the financial sustainability of key government projects, such as the Asia Infrastructure Investment Bank, the ‘One Belt, One Road’ initiative and a domestic infrastructure plan based on urban development . In addition, Beijing will now have to respond to a fundamental question that it has avoided for years: will China become a wellfunctioning market economy, or will state capitalism continue to drive the operations of the world’s second largest economy? IV. Reference www.socialistparty.ie https:www.un.org Minxin Pei (2015), “China’s big, misguided stock market gamble”. Fortune July 6, 2015; The Economist (2015), “China’s botched stockmarket rescue”, Jul 30, 2015; The Economist (2015), “China’s stockmarket: A crazy casino”, May 26, 2015; http:www.chfsdata.org http:www.hnx.vn http:www.worldexchanges.orgmemberexchanges http:thomsonreuters.comen.html

FOREIGN TRADE UNIVERSITY INTENATIONAL ECONOMICS FACULTY - MID-TERM ESSAY TOPIC: CHINESE STOCK MARKET TURBULENCE 2015-2016 AND ITS IMPACT ON GLOBAL ECONOMY Class: TCHE Group Lecturer: Assoc Prof Mai Thu Hien Hà Nội, 03-2019 MEMBERS OF GROUP STT NAME STUDENT ID Table of Contents: I Introduction - 1.1 Rationale of research: - - 1.2 Research objectives: - - 1.3 Research methodology: .- - II Content - 2.1 Chapter 1: The turbulence of Chinese stock market - - 2.1.1 Literature Review - 2.1.2 Reasons lead to Chinese stock market turbulence .-  Background - - 2.1.3 How the incident affected Chinese domestic economy - 10 2.2 Chapter 2: The turbulence impacts on global economy - 18 - 2.2.1 Overview of the global economy from 2015 to 2016 - 18 2.2.2 Lesson for Vietnam .- 21 III Conclusion - 23 - IV Reference - 24 - I Introduction I.1 Rationale of research: The aim of this research is to analyze the information transfer in Chinese stock market around the crash of 2015-2016, and to reveal the impacts of this crash on the interactions between sectors To the best of our knowledge, this question has not been studied systematically in the existing literature I.2 Research objectives: After decades of rapid growth, China has become the world’s second largest economy It plays an important role in global trade However, its stock market has displayed poor performance since the US subprime crisis Under the background of deepening economic reform, the Chinese stock market began to boom around July 2014 Tens of millions of new investors entered the market The great majority of them were retail investors, which tended to exhibit herd behavior Moreover, many of these novice investors engaged in leveraged trading through various channels, for example margin financing of brokerages, shadow banking, or grey-market (over-the-counter, OTC) margin lenders Huge amounts of borrowed money flooded into the market The Shanghai stock exchange composite index (SSECI) soared from 2050.38 on July 2014, to a peak of 5166.35 on 12 June 2015 It increased about 152% in just one year However, after the peak, the market plunged drastically From late June to late August of 2015, the SSECI declined about 40% It was one of the biggest falls in global stock market history In order to stabilize the market, the Chinese government took a series of actions, including organizing state-backed financial firms collectively called the “national team” to buy stocks directly, banning short sales, stopping new initial public offerings, etc Through these efforts, the market turbulence ended in February 2016 This crash brought heavy losses to Chinese investors and the economy Market capitalization up to trillions of US dollars evaporated It also impacted the world markets I.3 Research methodology: Analyzing information transfer is one of the fundamental subjects for complex system studies It characterizes the interactions between components and provides important insights into the structure and dynamics of the system This issue attracts many researchers from different fields, for instance neuroscience, physics, climatology, and zoology, etc II Content II.1 Chapter 1: The turbulence of Chinese stock market II.1.1 Literature Review China is the world’s largest investor and greatest contributor to global economic growth by wide margins, and will remain so for many years The efficiency of its financial system in allocating capital to investment will be important to sustain this growth This paper shows that China’s stock market has a crucial role to play Since the reforms of the last decade, China’s stock market has become as informative about future corporate profits as in the US Moreover, though it is a segmented market, Chinese investors price risk and other stock characteristics remarkably like investors in other large economies They pay up for large stocks, growth stocks, and long shots, and they discount for illiquidity and market risk China’s stock market no longer deserves its reputation as a casino In addition, the trend of stock price informativeness over the last two decades is highly correlated with that of corporate investment efficiency China’s stock market appears to be aggregating diffuse information and generating useful signals for managers On the buy side, because of its low correlation with other stock markets and high average returns, China’s stock market offers high alpha to diversified global investors who can access it Yet this high alpha amounts to an inflated cost of equity capital, constraining the investment of China’s smaller, more profitable enterprises Further reforms that open this market to global investors and improve stock price informativeness will be important to increase China’s investment efficiency and fuel its continued economic growth Finally, we interpret the stock market’s recent gyrations through the lens of this research, arguing that its post-crisis lag was a rational downward adjustment to competition from the rapidly expanding shadow banking sector, and its enormous rally last year is a cheer for the roll out of deposit insurance and other Third Plenum reforms More than ever, China’s stock market is a crucial counterpart to its extraordinary, relationship-driven, but opaque banking sector China’s stock market may now be the world’s most important crystal ball II.1.2 Reasons lead to Chinese stock market turbulence  Background Following a period of closure during the early history of the People's Republic of China, the modern stock market in China reemerged in the early 1990s with the re-opening of the Shanghai Stock Exchange, and founding of the Shenzhen Security Exchange By 2000, the Chinese stock market had over 1,000 listed companies, worth a market capitalization of nearly a third of China’s overall gross domestic product (GDP), and by the end of 1998, investors had opened nearly 40 million investment accounts As more companies went public, investors rushed to the Shanghai and Shenzhen exchanges The Chinese stock market and economy grew quickly, and by 2012, the number of listed companies between the Shanghai and Shenzhen Securities Exchanges had risen to over 2,400, worth a market capitalization of nearly 50% of China’s real GDP, and included over 200 million active stock and mutual fund accounts China's economic growth, however, was stunted by the 2008 global recession and its aftershocks The Chinese government responded to 2008 recession with a stimulus package that would draw resources from both the public and private sectors in order to fund an unprecedented infrastructure build Growth following the stimulus package was rapid - from 2009 to 2011, real GDP growth in China grew at approximately 9.6%, though in the two years that followed, real GDP growth fell to 7.7% Seeing the opportunity for a nationwide reinvestment into the economy through the stock market, the government developed a campaign that would entice everyday citizens to trade – it was referred to as "Zhong-guo-meng", which translates to the "Chinese Dream" First conceived and pushed by the President of China, Xi Jinping, the ‘dream’ was one of overall economic prosperity and an elevated international status The trading population that developed in China differed in important ways from those elsewhere in the world In China, the stock market trading activity is dominated by individual investors (close to 85%) – also known as ‘retail investors.’ Indicative of the sheer size of investor inflow into the markets, after several months of a bull market developing in China, more than 30 million new accounts were opened by retail investors in the first months of 2015, according to data from the China’s Securities Depository and Clearing Corp And while a larger, more active investing population generally means greater market capitalization, many of these new traders were inexperienced and easily manipulated by the buying frenzy, with nearly two thirds having never entered or graduated high school, according to a survey by China’s Southwestern University of Finance and Economics As a result, momentum and rumors among the traders carried more weight than reason when it came to investing decisions, creating a trend of impulsive buying and overvaluation in the market Leading up to the crash, in an attempt to free up additional money for trading, the China Securities Regulatory Commission (CSRC), responsible for proposing and enforcing securities laws, had loosened several related financial regulations Prior to significant policy reform in 2010, the act of selling short – essentially, borrowing and selling stock with the belief that its price will fall – and trading on margin – trading with debt – were strictly prohibited in China However, in March 2010, China implemented a testing phase for their stock exchange in which 90 selected companies were authorized to be sold short and traded on margin This list was expanded over time, with over 280 companies being given the same authorization in late 2011 Shortly thereafter, the CSRC implemented a total policy shift which legalized both practices across the entire stock market These regulation changes led to significant increases in borrowing for the purpose of trading, and short selling became the most popular investing strategy among traders From 2010, when the changes were implemented, to 2012, average daily short turnover increased from 0.01% to 0.73%, and average daily margin purchase turnover increased from 0.78% to 5.15% As a result, the Chinese market was being flooded with debt-funded trades and risky short selling plays To make matters worse, the CSRC also became a regulatory bystander, refusing to take action that would upset the political and social stability of the time Instead of delisting public companies that failed to perform for three consecutive quarters – a well-known regulation in China – the CSRC would regularly let those companies slide for fear of upsetting the shareholders This added to the flames of bad investing, allowing investors to continue pouring their money into companies that were underperforming and overvaluing shares that were essentially worthless on the books  The cause Before reaching the ceiling on June 12, 2015, China’s stock market had ballooned about 150 percent in a year The Chinese stock market crash began with the popping of the stock market bubble in mid-June (starting on June 15, 2015) A third of the value of A-shares on the Shanghai Stock Exchange was lost within one month following the event The Bank of England gave a frightening illustration of the enormous scale of the Chinese stock market rout, stating that the $2.6 trillion wiped off the Shanghai and Shenzhen Composite indexes in the initial 22-day summer market rout is equivalent to the entire GDP of the UK in 2013, and amounts to seven and a half times the nominal value of outstanding Greek government debt The carnage did not end in 22 days Major (more severe) aftershocks occurred around July 27 (the Shanghai Composite Index fell by 8.5 percent, marking the largest fall since 2007) and again on August 24 “Black Monday” (8.5% fall in the Shanghai Composite Index) and August 25 “Black Tuesday” (another 7.6% fall) As of this writing, as can be seen in the following charts and 2, the market seems to have calmed down with the index hovering around 2900 points (compared to 5178 peaks reached on June 12) However, this relative quietness, along with shares languishing in their lows and low trading volume and volatility, shows that the market is now left in the doldrums, and is likely to be stuck for a long time Altogether, last summer’s herd stampede has practically erased the Chinese stock market gains in the first half year of 2015 completely The source of any stock market crash may vary over specific circumstances, but one general reason remains generically the same: What goes up must come down Thus we need to understand what caused the bubble in China’s stock market to form (buying frenzy) and pop (panic selloff) Between June 2014 and June 2015, China’s Shanghai Composite index rose by 150 percent There was a strong sign that the seemingly bull market was actually entering the bubble territory as it is not justified or consistent with the economic fundamentals The value of many shares rose at a rate and speed that made little sense Many companies with meager earnings (or even losses) were seeing a meteoric rise in their shares Meanwhile, the country’s broader economy was going the other way, with economic growth slowing down significantly (the economic growth rate has fallen from double-digit figure in previous years to 7%, dubbed the “New Normal” by Xi-Li leadership.) In other words, in a healthy market, stock market booming usually signals an economic expansion But the Chinese economic growth has been declining in the past few years and was not expected to go back to the brisk growth in the near future Therefore, the 2014-2015 run-up was clearly a bubble without support from the real economy A big reason for the stock market rally was that a lot of ordinary Chinese people began investing in the stock market for the first time More than 40 million new stock accounts were opened between June 2014 and May 2015 Unlike other major stock markets, which are dominated by professional money managers, retail investors account for around 85 percent of China’s trade “A majority of the new investors in China’s market don’t have a high school education (6% are illiterate) There are now more retail investors in the Chinese stock market (90 million) then there are members of China’s Communist Party (88 million)”, as reported by Reuters These inexperienced retail investors dramatically increased the volatility of the market leading to much greater fluctuations in the stock market than would otherwise be the case This is because of they, unlike institutional investors who are professionals engaging in long-term investments on the basis of rational market analysis and projections, typically engage in short-term speculations based on hearsays, rumors, and irrational projections As a result, they tend to exhibit herd behavior causing much greater share price fluctuations than would otherwise be the case Worse yet, many of these novice investors were making highly leveraged purchases with borrowed money This practice, known as “trading on margin”, used to be prohibited in China But then the Chinese government lifted the prohibition changing policy to strictly regulate the practice of margin trading Over the past five years, the Chinese authorities have gradually relaxed the restrictions on margin trading The newly relaxed rules still included an important safeguard, though: a 2-to-1 margin requirement said that only half of invested funds could be borrowed The investor needed to put up the rest of the funds herself There were also restrictions on which stocks you could buy and how long the money could be borrowed―rules designed to prevent speculative mania from getting out of hand However, people also found a number of creative ways to evade these requirements As a result, many people have been able to make even riskier bets than the official rules allowed The borrowed money flooded into the Chinese stock market between June 2014 and June 2015, helping to push stock prices up 150 percent During this period, the amount of officially sanctioned margin trading in the Chinese stock market ballooned from 403 billion yuan to 2.2 trillion yuan Experts estimated that another trillion yuan or so of borrowed money has flowed into the markets using vehicles designed to skirt official limits on margin trading So, margin trading―and margin debt―skyrocketed, and a perfect storm was forming The surge in stock prices alarmed Chinese authorities Earlier this year they took steps to rein in margin trading and other forms of leveraged investing In January, they raised the minimum amount of cash needed to trade on margin They also punished a dozen companies for failing to enforce rules on margin trades In April the government cracked down on vehicles designed to skirt the margin trading rules The government’s toughest measures came on Friday, June 12, when China’s securities regulator announced a new limit on the total amount of margin lending stock brokers could do, while also reiterating the curbs on illicit margin trading Looking back, this announcement acted as the last straw and triggered the market to fall on the following Monday When the market nose-dived, investors faced margin calls on their stocks and many were forced to sell off shares in droves, precipitating the crash further Now the bubble has popped So on the surface, it looks as though the retail investors are to be blamed for their own irrational exuberance that caused the crash But beneath the surface, the Chinese government is not without fault (if not to be faulted as the culprit, at least to be blamed for mismanagement) The crash also reflects the underlying structural problems of the economy In the recent past years (especially since the 2008 great recession), Beginning in the early 1990s China has achieved two decades of remarkable double-digit growth But it is increasingly clear that this export and investment-led growth is not sustainable without substantial restructuring and rebalancing of the economy Then came the 2008 great recession, causing global demand to fall precipitously and China could no longer keep its growth going through exports And its own citizens weren’t consuming enough to create the demand necessary to keep the growth engine revving either The Chinese government’s answer was to mount a massive stimulation package, using monetary policy, state-owned banks, local governments, and other tools under its control to push internal investment The result was a massive buildup in factories, highways, airports, real estate, and much more Some of these investments were wise Many weren’t China has become famous for its profusion of empty stadiums, skyscrapers, and ghost cities The result is a lot of overcapacities and many state-owned enterprises and local governments are ridden with enormous bad debt This is part of why the Chinese government encouraged the stock market boom As said by an analyst, “The Chinese government basically comes up with this plan They see they have these heavily indebted companies that need to raise money to clean up their balance sheets They realize there are these huge savings in China that can be put into the stock market So they begin talking up the stock market and they make it easier to use margin debt And margin debt exploded.” In a sense, the stock market boom was caused by government’s strategy to solve the debt problem of zombie state-owned enterprises and the government’s (China Securities Regulatory Commission) facilitation of margin trading by relaxing the previous restrictions This coincided with the timing when the Chinese property market went down, and people who were putting their money in property began looking elsewhere for better returns Lots of novice investors got into the stock market because the Communist Party, in word and deed, was pushing them into a debt-fueled binge in the stock market State media also played a prominent role in drumming up the stock market bubble in the first place The official Xinhua News Agency published eight articles on the stock market in a space of three days in early September 2014 to solicit investors joining the historic gambling, and in March 2015, the CCP’s mouthpiece People’s Daily issued a three-article series, “A Share Volatility [Is Part of] a Slow Bull; [Index] Expected to Challenge 4000.” As the Economist puts it, “The government got all of the corporations in China that were going broke to go public Then, they got the average Chinese citizen to invest.” and “Officials are seen to have promised the population a bull market, only to lure them into a bear trap” (quoted by James Richards in his blog posted on August 10, 2015, at Daily Reckoning.com) II.1.3 How the incident affected Chinese domestic economy a The Shanghai stock market crash The Chinese stock market turbulence began with the popping of the stock market bubble on 12 June 2015 and ended in early February 2016 In August 2015 the Shanghai Composite Index (SCI) fell by more than 20 % The losses, concentrated at the end of the month, represented the second significant market drop in less than two months, following a similar plunge in July The rout has been dramatic, but so had the gains; the recent period of financial turbulence in China has come of the heels of remarkable increases: the Shanghai stock market grew by more than 150 % between June 2014 and June 2015 In this summer’s crash, Chinese investors have lost about EUR trillion – a sum higher than China’s entire market capitalisation in 2012 In the weeks since the SCI reached its 12 June peak, the index has lost more than 40 % of its capitalisation The smaller and technologically-oriented Shenzhen Stock Exchange (STE) has suffered even higher losses, nullifying all its 2015 gains Shanghai composite index (2014-15) Yet as dramatic as the drop has been, the effects of the recent financial crash on the Chinese economy have been relatively limited This is largely due to the nature of investors exposed to losses: in China, stocks account for less than 15 % of household financial assets 10 Just to 10 % of Chinese citizens are in fact exposed to such market fluctuations By comparison, 55 % of US citizens have savings invested in stocks Moreover, most Chinese investors belong to the middle and upper classes and have benefitted from significant gains made in the hectic months that preceded the burst: the bubble has burst, but valuations still remain above their levels of one year ago Coupled with a more general slowdown in the Chinese economy – whose growth rates are projected to hover around % over the next five years, lower that the double-digit growth recorded for about two decades – the stock markets’ disturbance has greatly reduced foreign investors’ confidence in China’s model of development The crash has also cast serious doubt on Beijing’s management of the financial markets Even more disconcerting than the recent stock market crisis, however, is the fundamental crisis of the Chinese economic model This issue deserves a careful analysis to understand the long-standing implications on global economic growth  Chinese RMB On 11 August, two months after the turbulence, the People's Bank of China devalued the RMB - by 1.86 percent to CN¥6.2298 per US dollar A lower renminbi (RMB) "makes China’s exports more competitive in foreign markets, offsetting part of the surge in the country’s blue-collar wages over the last decade; and it makes foreign companies, houses and other overseas investments seem more expensive." On 14 August, the central bank devalued it again to CN¥6.3975 per US dollar In August there was speculation about the causes of the devaluation of the yuan and the changes in the Chinese economy in 2015, including the "growth in its services sector rather than heavy industry" By mid-January 2016, an article in The Economist argued that the strains on the yuan indicated a problem with China's politics However, a spokesperson for the International Energy Agency(IEA) argued that the risk was "overplayed" During the drastic sell-off on January 2016 China's central bank, the People’s Bank of China set the official midpoint rate on RMB to its lowest level since March 2011— at CN¥6.5646 per US dollar On October 2015 China launched a new clearing system developed by the People’s Bank of China (PBOC) - Cross-Border Inter-Bank Payments System (CIPS) - to settle crossborder RMB transactions and intended to "increase global usage of the Chinese currency", by "cutting transaction costs and processing times" and removing "one of the biggest hurdles to internationalizing the yuan" Because of the stock market turbulence, the launch had been delayed and CIPS was '"watered down" offering, a "complementary network for settling trade-related deals in the Chinese currency to a current patchwork of Chinese clearing banks around the world" By December 2015, the RMB was still the "fifth most used global payments currency and the second most used currency for trade finance" with 27 per cent of China's goods invoiced in RMB compared to 19 per cent in 2014 In December China was the world's largest exporter By October 2016, the Renminbi will be added to the special drawing rights 11 currency basket, the foreign exchange reserve assets defined and maintained by the International Monetary Fund, which includes the U.S dollar, Euro, Japanese yen and pound sterling The IMF's decision to add the RMB to the SDR, was "crucial to global financial stability" as it would encourage China to "continue to be a responsible global citizen and liberalise its exchange rate, while intervening to ensure a gradual decline"  China’s PMI In August 2015, Caixin Media - a closely watched gauge of nationwide manufacturing activity - announced that the China Purchasing Managers' Index (PMI) had declined to 51.5 This was the beginning of a decline that continued into December 2015 with the PMI falling below 50 - anything below 50 indicates deceleration PMIs are economic indicators derived from monthly surveys of companies' purchasing managers and is produced by the financial information firm, Markit Group, which compiles the survey and conducts PMIs for over 30 countries worldwide From 2010 to 2015 HSBC had sponsored Markit's China PMI, but that relationship ended in June and Caixin stepped in By 2016 the PMI was down for the fifth month indicating a cooling in manufacturing in China Manufacturing activity is a key sign of economic performance December was the tenth month in a row that manufacturing in China had contracted raising concerns that China's economy was not on steadier footing It was seen as the most recent indication of slowing global economic growth Since China is the world's largest metal consumer and producer, and "the world’s second largest economy", the China PMI is closely watched This 2016 selling frenzy was fueled by the most recent private survey of factory activity, the December 2015 report by Caixin on China's Purchasing Managers' Index (PMI) reading which showed that China's manufacturing activity had slowed again in December 2015 to a PMI reading of 48.2 - with anything below 50 indicating deceleration b Chinese government’s reaction The Chinese government enacted many measures (more than 40 and counting) to stem the tide of the crash Regulators limited short selling under threat of arrest Large mutual funds and pension funds pledged to buy more stocks The government stopped initial public offerings The government also provided cash to brokers to buy shares, backed by centralbank cash State-run media continued to persuade its citizens to purchase more stocks In addition, China Securities Regulatory Commission (CSRC) imposed a six-month ban on stockholders owning more than percent of a company's stock from selling those stocks Further, around 1300 total firms, representing 45 percent of the stock market, suspended the trading of stocks starting on July The following is a chronological listing of all the different policy buttons China has pressed on its financial crisis console since stocks started unraveling after mid-June 12 June 27 1) China’s central bank, People’s Bank of China, cuts interests rate by 0.25% June 30 2) Asset Management Association of China (AMAC) requests investors and fund managers to stay rational and not to panic July 3) Brokers loosen margin financing requirements; the practice of lending to retail investors who use the money to trade shares 4) State Council decides to suspend large public share offerings until Shanghai Composite Index of shares returns to 4500 level 5) Police investigate three media outlets for spreading rumors and the government vows to impose heavy penalties for manipulation Government-run news sources Xinhua and People’s Daily both publish articles calling for investors’ confidence July 6) Margin financing: some brokers lower threshold and loosen policy again 7) Crackdown on short selling and several brokers suspended the business July 8) China Financial Futures Exchange (CFFEX) restricts index future trading 9) China Securities Finance Corporation (CSFC) to use funds contributed by various brokers to buy exchange traded funds Social Securities Fund (SSF) vows not to reduce existing equity positions in its portfolio July 10) China Insurance Regulatory Commission (CIRC) allows insurers to invest more in blue-chip stocks July 11) PBOC vows to maintain market stability and avoid systematic financial risk It will provide ample liquidity to CSFC via interbank lending, financial bond, pledged financing, and relending facilities 12) CSFC grants credit to 21 brokers via pledged stocks to allow them to buy more equities 13) CSFC invests in mid cap stocks via mutual funds July 14) China Securities Regulatory Commission (CSRC) suspends reviews of share offerings 15) China Banking Regulatory Commission (CBRC) allows banks to roll over matured loans pledged by stocks 16) Minister of Public Security & CSRC investigates “malicious” short selling activities 17) CSFC says it will purchase mutual fund products to stabilize liquidity July 13 18) CSRC probes trading system vendor Hundsun Tech for allowing illegal margin financing 19) China tightens rules on futures trading 13 July 15 20) CSDC to extend business hours for major shareholders to increase their own companies’ stock holdings July 16 21) CSRC demands brokers’ proprietary trading to maintain net purchase on daily basis and it will allow brokers equity investment to exceed risk limit during special period July 17 22) CSFC receives RMB 1.3 trillion from 17 commercial banks July 20 23) CSRC clarifies that government money will not be exiting the stock market July 27 24) CSRC denies rumor that state buying has stopped July 30 25) CSFC grants Rmb200 billion liquidity to five mutual funds 26) CIRC urges insurers not to net sell equities in near future and demands daily report on equity holdings 27) China Securities Depository and Clearing Co., Ltd (CSDC) cuts fees August 28) CSRC investigates electronic trading; 24 funds suspended for months 29) Shanghai Stock Exchange (SHEX) and Shenzhen Stock Exchange (SZEX) significantly raise commission to discourage program trading 30) Policy banks announce RMB trillion bonds to support infrastructure and construction in coming years 31) Stock markets change settlement dates to discourage speculative short-selling and to mitigate intraday volatility August 32) Speculation that CSFC has war chest of RMB3 trillion to invest in stock market 33) CSRC vows to crack down on margin financing and illegal short selling August 11 34) PBOC adjusts currency fix, devaluing by 3% Four out of five of the CSFC-invested mutual funds have started investing in A-share stock market August 14 35) CSFC publishes its exit plan: Part of its stock holding will be transferred to Huijin; CSFC says it won’t exit the stock market over the next few years 36) Ministry of Finance (MOF) relaxes rules for state-owned venture capital funds August 18 37) CSRC investigates HOMS and Hithink Royal flush for illegal lending to finance retail stock purchases (margin financing) August 21 38) CSRC suspends approval of 191 mutual funds and seeks to encourage more risktolerant investors August 23 14 39) State Council issues new pension fund investment guidelines, allowing stock investment at 30% of net assets August 25 40) Chinese central bank PBOC cuts interest rates by 0.25% September 41) Ministry of Finance (MOF) said it would remove personal income tax on dividends for shareholders who hold stocks for more than a year October 24 42) Chinese central bank PBOC cuts interest rates by 0.25% Despite the myriad of measures mentioned above that were taken by China’s policymakers in their attempt to “rescue” the market, the authorities have failed to prop up the stock market prices By the end of August, it appears that the government has abandoned initial plans to boost stocks up to their self-proclaimed mandate level of 4500 points While it may be still too early to give an “F” grade to the Chinese government’s performance in this case study of public crisis management, suffice to say that up to now they have not effectively managed to solve the problem Most of those measures mentioned above have not really worked Some of these policies such as the interest rate cuts, loosening rules on pension fund investing, and banning short selling look more like the result of hastily formed (out of panic) rather than carefully thought out policies There’s only one thing that seems to have a real effect: the direct stock purchases through the government’s so-called “national team” The “national team” is the collective name given to state-backed and state-directed Chinese financial firms who have been ordered to directly buy stocks in an attempt to boost investor confidence As the name suggests, these firms work in tandem to push share prices higher So far the “national team” has not been successful in pushing share prices higher to the targeted level of 4500 points, but at least it has been widely credited for helping to prevent even greater market losses The working of the “national team” is evident in many intraday transaction activities: when the market starts to decline “abnormally” showing a sign of wild selloff, there will be mysterious surge of large volume purchases hinting that the “national team” is entering the market This “national team” staged rally typically occurred in the last hour of trading before the markets close Just how much money has the “national team” put towards stocks over the past three months? According to Goldman Sachs analysts, it’s a near-unbelievable 1.5 trillion yuan, or $US236 billion Given that the market capitalization of Amazon is around $US236 billion, this means that China has spent the entire Amazon market capitalization to prop up its stock market, an extremely expensive policy-making on the part of the Chinese government Cost-effectiveness issue of policy-making aside, the market rescue actions also have profound implications Above all, the incessant meddling in the nation’s stock market, which borders on outright market manipulation, is an irony of trying to save the market but ending up with harming (if not killing) the market The authorities used several draconian tactics such as banning some investors from selling, investigating those who still choose to sell and 15 arresting those who have sold shares “maliciously”, and even detaining and forcing the journalist to apologize on state television for reporting (“spreading the rumor”) that CSRC was preparing an exit plan from outright share purchases These tactics may prevent market melt-down in the short term, but will chill the market in the long term, and also have the side effect of moral hazard and market distortion Some bold scholars inside China also criticize government’s handling of this matter For example, Yongding Yu, the Director of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences, said “The current stock market unrest does not constitute a systematic crisis, and so the government should not intervene What is happening to China’s stock market now is not panic selling but a re-evaluation of the prices It is inevitable that there is some overshooting in this process, but the government should not take the place of the market and put prices on stocks” (The New York Times, Sept 14, 2015) While the Chinese government initially appeared reluctant to intervene in the financial turmoil, Beijing ultimately responded to the stock collapse with a set of exceptional measures, intervening in the operations of the country’s stock exchanges The government's measures included compulsory orders that brokers buy shares, as well as a prohibition that shareholders (in particular SOEs - state owned enterprises) sell Other measures included a suspension of initial public offerings and a further relaxation of the rules governing insurance companies’ stock purchases The Chinese Central Bank also pledged to lend 260 billion renminbi (about EUR 36 billion) to major brokerage firms via the China Securities Corporation, thereby avoiding a scenario in which the firms ran out of liquidity In addition to all these initiatives, most of the companies listed on the two Chinese stock exchanges were either suspended or put under strict control by the Chinese financial authorities Shanghai Stock Exchange suspensions (June-July 2015) China’s stock regulator also introduced the ‘Announcement 18’, threatening ‘severe punishment’ for any senior manager or major shareholder (one holding a stake of % or 16 more) selling shares of a listed company during a period of six months With a single announcement, trillions of RMB in assets belonging to some of China’s wealthiest investors were frozen for half a year The securities regulator announced that there were no plans for how and when major shareholders could resume selling their shares, stating instead that the rules for future selling would be outlined in ‘further decrees’ It is still unclear when the Chinese government will scrap these exceptional measures Some have already been lifted, but most exceptional measures remain in place at the time of writing In the medium and long term, they may well disappoint major Chinese and foreign shareholders and reduce the liquidity available to finance private sector investments If the measures are not rapidly terminated, they may also effectively delay urgent structural reforms and jeopardise growth over the long term Another government intervention has involved China’s currency On 11 August 2015, the People’s Bank of China (PBOC) announced its decision to liberalise the RMB reference rate, traditionally set by the central bank The move triggered an immediate, significant depreciation of the Chinese currency, suggesting Beijing’s intention was to depress the currency to boost exports and support the domestic economy This move did not, however, please international markets, which perceived the decision as a sign of weakness Exchange rate USD/CNY 2010- 2015 In the end, according to 19 January 2016 articles in the Xinhua News Agency, the official press agency of the People's Republic of China, China reported a 6.9 percent GDP growth rate for 2015 and an "economic volume of over ten trillion U.S dollars" Forbes journalist argues that the "stock market crash does not indicate a blowout of the Chinese physical economy." China is shifting from a focus on manufacturing to service industries and while it has slowed down, it is still growing by 5% After this last turbulence, as of January 2017 the Shanghai Composite Index has been stable around 3,000 points, 50% less than before the bubble popped 17 II.2 Chapter 2: The turbulence impacts on global economy II.2.1 Overview of the global economy from 2015 to 2016  The world economy stumbled in 2015 The world gross product is projected to grow by a mere 2.4 per cent in 2015, a significant downward revision from the 2.8 per cent forecast in the World Economic Situation and Prospects as of mid-2015 More than seven years after the global financial crisis, policymakers around the world still face enormous challenges in stimulating investment and reviving global growth The world economy has been held back by several major headwinds: persistent macroeconomic uncertainties and volatility; low commodity prices and declining trade flows; rising volatility in exchange rates and capital flows; stagnant investment and diminishing productivity growth; and a continued disconnect between finance and real sector activities A modest improvement is expected to start next year, with global growth reaching 2.9 per cent and 3.2 per cent in 2016 and 2017, respectively The anticipated timing and pace of normalization of the United States monetary policy stance is expected to reduce some policy uncertainties, while preventing excessive volatility in exchange rates and asset prices While the normalization will eventually lead to higher borrowing costs, rising interest rates should encourage firms to increase investments in the short run The improvement in global growth is also predicated on easing of downward pressures on commodity prices, which should encourage new investments and lift growth, particularly in commodity-dependent economies The developed economies are expected to contribute more to global growth Growth in developed economies is expected to continue gaining momentum in 2016, surpassing per cent for the first time since 2010 In developing and transition economies, growth slowed in 2015 to its weakest pace since the global financial crisis amid sharply lower commodity prices, large capital outflows and increased financial market volatility Growth is projected to reach 4.3 per cent in 2016 and 4.8 per cent in 2017, up from an estimated 3.8 per cent in 2015 Despite the slowdown in China, East and South Asia will remain the world’s fastest-growing regions, with many of the region’s commodity-importing economies benefiting from low prices for oil, metals and food GDP growth in the least developed countries is expected to rebound from 4.5 per cent in 2015 to 5.6 per cent growth in 2016, but will fall short of the Sustainable Development Goal target of at least per cent GDP growth per annum in the near term While developing countries have been the locomotive of global growth since the financial crisis, the developed economies, particularly the United States of America, are expected to contribute more to global growth during the forecast period  Low inflation persists in developed economies, while volatility of inflation and growth remains high Amid persistent output gaps, declining commodity prices and weak aggregate demand, global inflation is at its lowest level since 2009 In developed-market economies, annual  18 inflation in 2015 is expected to average just 0.3 per cent Ultra-loose monetary conditions have so far prevented deflation from becoming entrenched in the developed countries However, low inflation has been associated with higher levels of volatility in inflation, growth, investment and consumption in a majority of large developed and developing countries and economies in transition Significant currency depreciations have offset the disinflationary pressures in several developing economies The Brazilian real and the Russian rouble have recorded large depreciations, and both countries remain mired in severe economic downturns, accompanied by elevated inflation The economic slowdown hurts labor markets Unemployment is on the rise in many developing and transition economies, especially in South America, while it remains stubbornly high in countries such as South Africa At the same time, labor force participation rates, especially among women and youth, have been declining, and job insecurity has become more widespread, amid a shift from salaried work to self-employment The declining employment intensity of growth in many countries, coupled with stagnant real wages, poses a challenge to promoting inclusive and sustainable economic growth, employment and decent work for all  Investment experienced sharp and broad-based deceleration Growth rates of fixed capital formation have registered sharp declines in a majority of developed and developing economies since 2014, including negative investment growth in nine economies The weak aggregate demand, falling commodity prices and persistent policy uncertainties constrained investment growth during 2014-2015 A modest pickup in investment is expected, provided commodity prices not slide down further and the anticipated normalization of the United States monetary stance reduces policy uncertainties However, coordinated efforts are still needed at national and international levels to ensure that financial sectors effectively intermediate savings and liquidity and also stimulate fixed investments  Reducing poverty and emission levels will require concerted policy efforts The broad slowdown in economic growth in many developing economies and generally weak wage growth will restrain progress in poverty reduction in the near term Further progress in poverty reduction will rely heavily on policies to reduce inequality, such as investment in education, health and infrastructure, and stronger social safety nets Global energy-related carbon emissions experienced no growth in 2014 for the first time in 20 years, with the exception of 2009 when the global economy contracted, suggesting that a delinking of economic growth and carbon emission growth is possible with appropriate policies and adequate investment Low-carbon energy sources now account for over 50 per cent of new energy consumption worldwide   The commodity price decline has had significant adverse effects on trade flows and public finance 19 The terms-of-trade of commodity exporters have deteriorated significantly, limiting their ability to demand goods and services from the rest of the world Current-account balances of commodity exporters have deteriorated, and given the net outflow of capital from many commodity-dependent economies, countries have been forced to either draw down international reserves or cut back imports This has had second order effects on trade in noncommodity-exporting economies, compounding longer-term trends, such as the slower expansion of global value chains and limited progress in multilateral trade negotiations, which weigh on the volume of global trade The commodity price declines and exchange-rate realignments have also had a significant impact on fiscal balances, particularly in the commodity-dependent developing and transition economies The sharp decline in the headline value of global trade, however, is largely attributable to the deterioration of commodity prices and appreciation of the dollar Trade volumes have recorded a more moderate deceleration, reflecting a widening divergence between the value and volume of global trade Financial market volatility has increased significantly The steady decline in global commodity prices, including a dramatic drop in the oil price, reflects a combination of ample supply and slowing demand Demand from China plays a key role in price swings for metals, in particular, as the country accounts for almost half of global metal consumption The combination of commodity price adjustments and capital outflows has been associated with sharp exchange-rate realignments and heightened volatility in foreign-exchange markets  Strengthening the multilateral trading system will allow countries to better exploit the benefits of trade International trade is an important determinant of global growth and development At the global level, there remains considerable untapped potential to exploit the benefits of international trade A universal, non-discriminatory multilateral trading system is a central element for harvesting this potential However, the Doha Round has made limited progress in the last fifteen years At the same time, there has been an increasing prevalence of newgeneration regional trade agreements (RTAs) Mega-RTAs can diminish incentives for universal negotiations, and may have adverse effects on countries not included in the RTA, especially developing countries The Trans-Pacific Partnership (TPP) is the first mega-RTA completed, and creates a market of 800 million people with over 40 per cent of the world gross product Non-TPP members, however, may be impacted by diversion of trade and investment towards TPP member countries This highlights the importance of enhancing coherence between RTAs and the multilateral trading system so they can support and sustain an enabling development environment  II.2.2 Lesson for Vietnam 20  Impact on Vietnam The international context fluctuates with the decline of the Chinese stock market and some stock markets around the world, combined with measures to adjust the VND/USD exchange rate in the country (after China devalued the yuan continuously) has a strong impact on Vietnam stock market The VN-Index has plummeted with a decrease of 15% in August after rising 13.8% in the first months of 2015 After falling 29.37 points (5.28%) in the day session August 24 (the strongest decline since May 8, 2014 - the time of the Rig 981 event), the VN-Index closed at 526.93 points, down 17% from the peak of The first months of 2015 (reached on July 14) and decreased by 3.4% compared to the end of 2014 The HnxIndex also dropped by 14% in August after rising 2.6% in the first months in 2015 and closed at 73, 09 points on August 24, 2015 (down 18% from the peak of the first months of 2015 set on July 6, 2015) Liquidity on the stock market in August decreased compared to July, but tended to increase when the VN-Index and HNX-Index declined, indicating a strong demand for low prices On average, there are 149 million shares on the HSX and HNX on the two exchanges, down nearly 20% compared to July Market capitalization (Ho Chi Minh Stock Exchange (HSX) and Hanoi Stock Exchange (HNX) fell to VND 1.15 million (as of August 24, 2015, estimated to reach 31% of GDP in 2014), down nearly 10% from July The main reason leads to decline including developments in the domestic and international monetary market Specifically: (i) Firstly, China devalued the domestic currency, leading some countries (including Vietnam) to adjust the exchange rate, which affected production enterprises and investors The unfavorable domestic and international stock market situation also increased the ability of foreign investors to withdraw capital; (ii) Secondly, oil and gas stocks were heavily affected by the world oil price dropped the most since 2009; (iii) Thirdly, banking stocks also fell sharply after negative information about Import-Export Commercial Joint Stock Bank (Eximbank) and East Asia Commercial Joint Stock Bank Positive factors such as lower gasoline prices or the issuance of Circular 123/2015 / TT-BTC guiding the ownership of foreign investors in listed companies is not enough to support the market However, the general assessment shows that fluctuations in the stock market in Vietnam in the recent time mainly stem from internal factors of the economy and psychological factors, rather than the direct impact from fluctuations of the Chinese stock market From an indirect perspective, the impact from the fluctuations of the Chinese stock market in Vietnam can be seen in the following aspects: Firstly, the volatility of the Chinese stock market may lead to a shift in the portfolios of Chinese investors and international investors on the Chinese stock market Accordingly, a part of the investment capital flow in the Chinese stock market may shift to other stock markets, including Vietnam, in search of a safer alternative market and a relatively good growth potential Research on foreign investment data on Vietnam stock market in the first months of 2015 showed that foreign investors tend to be net buyers on Vietnam stock market 21 (HSX and HNX) with a total value of VND 5,544 billion, of which, May and June had the highest net buying volume with the value of VND 1,394 billion and VND 1,532 billion respectively Secondly, China's total demand declined due to the loss of assets on the Chinese stock market may affect Vietnam-China trade (reducing Vietnam's exports to China while increasing imports from China) In terms of aggregate demand, China is now a country with great consumption, thanks to its large population and high income in recent years The asset value of investors holding Chinese stocks decline (over 30%) will affect the aggregate demand of this country, so the demand for Chinese imports from Vietnam may also decrease The key export sectors of Vietnam to China such as agriculture, seafood, minerals and other materials will be affected sectors In addition, with aggregate demand weakening while production capacity has been and continues to be surplus, On the one hand, China will seek ways to protect the domestic market before imported goods, on the other hand will make efforts to promote Chinese exports to other countries (including Vietnam) by many measures In the context of China's export competitiveness increased after consecutive depreciation of the yuan, the decline in Chinese demand due to the loss of assets on the stock market will be factors that can contribute to the increase trade deficit from China and Vietnam in 2015-2016 Thus, the impacts from fluctuations in the Chinese stock market to Vietnam can be seen both directly and indirectly, with positive and negative aspects In order to exploit opportunities and to minimize negative impacts from fluctuations in the Chinese stock market to Vietnam, the following issues should be paid attention to: (i) Improve management and supervision capacity to ensure ensuring safe and healthy development of the market, protecting legitimate interests for investors; (ii) Strengthen supervision, inspection and inspection of securities companies and fund management companies; (iii) Expanding the market with many investors, increasing the participation of financial institutions and foreign investors; (iii) Enhancing supply, diversifying products in the market in accordance with investors' needs; (iv) Diversify Vietnam's export markets as well as Vietnam's import markets to minimize negative impacts from China's aggregate demand decline; At the same time, restricting the import of non-essential goods from the Chinese market to limit the increase in trade deficit from China  Lesson for Vietnam China's stock market collapsed is a valuable lesson for developing markets including Vietnam The Chinese government's policy of monetary easing is basically aimed at supporting economic growth However, the side effects leading to the excessive rise of the stock market have gone beyond the control of the government This indicates that any risk can occur if there is a lack of coherence and synchronization in economic management In addition, the lesson also showed the importance of institutional and foreign investors to the financial market in general and the stock market in particular The collapse of the stock market has a large part of the investment movement which is a chain of a large 22 number of individual and small investors with limited knowledge about economy and finance On the positive side, the problems of the Chinese stock market are opportunities for Vietnam's stock market when the capital withdrawn from China will shift to new markets Especially in the context of Vietnam has emerged and caused much attention in the eyes of institutional and foreign investors The macro economy is on a positive recovery, with more and more "open" reforms and changes to the world, including policies to increase the ownership rate of foreign investors in Vietnamese enterprises Recent male III Conclusion The recent crisis plaguing Chinese stock markets has been dramatic, but has not – yet – completely burst of the bubble of valuations that could directly affect the country’s ‘real’ economy The Chinese government has reacted quickly to the crisis, so far managing to avoid a full-blown financial crisis The exceptional measures Beijing has deployed – including depreciation of the domestic currency in an attempt to boost declining export performance – would hardly be available in a full-fledged market economy These measures are obviously limited in time and may be lifted relatively quickly if the situation in financial markets improves and China does not abandon its efforts to gradually enter the global financial system Investors’ confidence in the growth and smooth operation of Chinese stock exchanges has, however, been shattered by recent turbulence This is especially true for a less experienced group of private, middle-class savers who enthusiastically invested in the stock market over the last year The current situation is also unfortunate as it has created expectations of further state intervention to support the economy By freezing stocks and assets, the markets may also drain much-needed liquidity from the real economy Analysts not agree on the likely outcome of the crash Economist Nouriel Roubini has argued that ‘there is only a moderate chance of the stock- market slump snowballing into a full-blown financial crisis However, this scenario is not excluded by other analysts, who consider ‘there are reasons to believe that this[the financial crisis] could turn out to be a more fundamental cooling of China than previously thought In any case, the recent financial crisis has overshadowed a certainty in the Chinese economy: a major slowdown The engine that was able to produce double-digit growth for decades seems to have been deactivated Beijing’s ‘new normal’ strategy has not yet produced its intended effects, and new and deeper reforms are needed to bring the Chinese economy back on track The crisis may also call into question the financial sustainability of key government projects, such as the Asia Infrastructure Investment Bank, the ‘One Belt, One Road’ initiative and a domestic infrastructure plan based on urban development In addition, Beijing will now have to respond to a fundamental question that it has avoided for years: will China become a wellfunctioning market economy, or will state capitalism continue to drive the operations of the world’s second largest economy? 23 IV Reference www.socialistparty.ie https://www.un.org Minxin Pei (2015), “China’s big, misguided stock market gamble” Fortune July 6, 2015; The Economist (2015), “China’s botched stockmarket rescue”, Jul 30, 2015; The Economist (2015), “China’s stockmarket: A crazy casino”, May 26, 2015; http://www.chfsdata.org http://www.hnx.vn http://www.world-exchanges.org/member-exchanges http://thomsonreuters.com/en.html 24 ... incident affected Chinese domestic economy - 10 2.2 Chapter 2: The turbulence impacts on global economy - 18 - 2.2.1 Overview of the global economy from 2015 to 2016 - 18 2.2.2 Lesson for Vietnam... bubble popped 17 II.2 Chapter 2: The turbulence impacts on global economy II.2.1 Overview of the global economy from 2015 to 2016  The world economy stumbled in 2015 The world gross product is projected... other large economies They pay up for large stocks, growth stocks, and long shots, and they discount for illiquidity and market risk China’s stock market no longer deserves its reputation as a casino