Ranked by GDP, China is one of the biggest economies in the world. And according to Bloomberg, Forbes and US News, it’s expected to surpass the United States within the next several years.
But, as solid an economy as the Chinese have enjoyed, it’s not been unwavering. Back in the mid-2010s, the world watched the Chinese stock market crash, and economies across the globe were concerned, to say the least.
Why did the Chinese economy falter as it did? Could it happen again? Let’s look at what happened, and the probability that the Chinese stock market will experience a similar occurrence in the future.
The Chinese Stock Market
The Chinese stock market is comprised of three major exchanges. These are the Shanghai Stock Exchange, the Shenzhen Stock Exchange and the Hong Kong Stock Exchange.
These markets operate a bit differently than those in the United States or elsewhere in two ways. First, the companies listed within the exchanges used to be largely state owned. That means that the government had a substantial say in what happens to the markets.
The second way these markets differ is that investors treat them differently. Historically, the Chinese stock markets have offered a bit of a “casino” for investors, and although that’s becoming less and less the case, it’s an important difference.
Retail investors comprise around 85% of Chinese stock market activity, as opposed to about 25% in America. Chinese households prefer, instead, to invest in banking accounts and other assets.
So, to summarize, the Chinese stock markets and the businesses which are listed therein have been historically state owned. If the market appeared to be dipping, the Chinese government could easily inject money into the economy to bail their companies out.
The Chinese Stock Market Crash
Up until 2015, the Chinese stock markets were impacted very little by other aspects of the economy. As a result, a stock market bubble was created as new investors began to enter the markets. Even businesses which had previously never traded were now enthusiastic about investing, and the bubble continued to grow.
Until it popped. On June 12, 2015, the Shanghai Stock Exchange lost a full third of its value, and the smaller exchanges experienced even more dramatic losses. The Chinese government worked frantically to prevent an economic catastrophe. They fed money to brokerages and compelled them to buy stocks, while ordering companies not to sell shares.
Meanwhile, markets across the world experienced panic as a result of this seemingly stable economy experiencing such a crisis. The Chinese economy was failing; how would this impact imports and exports, or the economies of other nations? Investors worldwide began to show signs of hesitancy.
The Chinese government’s bailout worked for a short time. The markets appeared to rebound a bit after the initial plummet, but over the next several months it saw more losses.
Chinese Stock Market Recovery
The Chinese government faced difficulty in 2015. Where government-owned businesses had once constituted the majority of traded stocks, now more privately owned companies were listed on the exchanges. With no way to bail these companies out, China was left facing a failing economy with no remedy.
In the months following the June 12 crash, Chinese stock markets remained turbulent, but then in early January of 2016, the markets were halted twice due to a 7% fall. On March 16, the Chinese stock market reached a 15 month low, further worrying both Chinese and global investors.
As stated, the Chinese government has a history of injecting money into the economy to ensure that the market remains stable. Following the low of March 16, the government did just that. Once again, a state backed agency offered loans to brokerages, assisting in balancing the teetering economy. Slowly, investor confidence rose again, and over the next several months, the Chinese economy was once again regaining in strength and declining in volatility.
Chinese Stock Market Crash: Can it Happen Again?
In short, the answer is yes. The Chinese stock market is wildly volatile, and booms and busts are not at all uncommon. In fact, the Chinese economy has very little to do with the stock market. It’s not uncommon for the economy to be suffering in terms of GDP or other factors, while the markets are booming. Likewise, the Chinese economy can be on the path to surpass the United States while the stock market is in trouble.
Because of this, investors don’t pay the same type of attention to the numbers as investors in the United States or other economies. They invest with very short term memory, and it’s likely that another bubble and subsequent crash will occur.
Secondly, the Chinese government has a huge hand in the stock market. A majority of stocks listed on, as an example, the Shanghai Stock Exchange are at least in part government owned. If the stock markets start slipping, it’s very easy for the government to issue a bailout. In the past, the state has attempted to change regulations to encourage more private investors, but haven’t been successful.
Finally, the Chinese stock market is heavily influenced by governmental rhetoric. The United States experiences this to some extent. As government leaders issue statements about the economy, investors react. But as a whole, US investing law remains unchanged. Chinese investors suffer a slightly different pattern. The government frequently issues statements which change policy entirely, and this causes investors to panic as they attempt to interpret the new rules.
Chinese Stock Market Crash: Speculation
There are other issues affecting the stock market which are worth a mention. High numbers of speculative investors as compared to the number of long term investors is a factor. The lack of reliable information about the companies listed within the exchanges is another. There is also a perception of the Chinese stock market being an avenue to “get rich quick.” Many investors have become very wealthy by playing the stock market, and there’s little incentive for long term investors.
So yes, the Chinese stock market can crash again. And it’s likely that it will. The Chinese government is sending its investors conflicting messages. While it claims to seek to create long term investors, it’s still too thickly involved in the markets to cause this to happen. Once the government lets the market drive itself, perhaps it won’t be as erratic.
