The China stock market crash was perhaps the final unraveling of the economic downturn that began in 2008.
As global markets were just about seeing signs of some normalization, the stock market crash in China put a further spanner in the global growth story.
When you talk about the stock market crash in China, you would have to see it in two parts: (1) the 2015 chapter and (2) the 2016 chapter.
In fact, the entire 8-9 month period was tumultuous for China.
The economic slowdown and currency devaluation added to the financial market woes, and there was hardly any sign of relief.
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Why Should We Care?
We should care because a stock market crash like the 1929, 2008 or the China stock market crash can easily wipe out our wealth.
I am writing this article because I want you to know that stock trading can be too risky.
Betting your retirement money on the stock market can easily ruin your life.
Indeed, stock and currency market trading and investment are the riskiest kinds of investments, especially because most people don’t know how to do it.
This is how the disaster happens:
- You don’t have a good source of income and a reasonable backup.
- You want to make more money, so that you decide to invest in stock market with whatever savings you have.
- The market crashes and you lose all your savings.
Why can you make such a decision while you are not ready to invest in the stock market?
One important reason is that you hear that so many others are doing it and many of them tell you that they are making a lot of money.
At the same time, the prices are going up and it looks like the best chance to get in and double your capital.
But no market keeps on going up forever.
Unfortunately, most people enter when the price has already reached a strong resistance level and the market is about to reverse.
What Is the Solution?
1. Trade with the Money That You Can Afford to Lose
The China stock market crash and also all the other market crashes like 1929, 2008 and the incoming market crashes, they have one important message for everybody:
Don’t Trade/Invest with the Money That You Cannot Afford to Lose.
If the money you can afford to lose is not enough to trade or invest in the currency or stock market, then you’d better to be out, keep on making and saving money until you become ready to enter the markets.
Now, the question is how much the money you can afford to lose is?
Most people think it is all the savings they have, but it is absolutely wrong.
It is true that you won’t get into trouble now if you lose your savings, just because you are making money and you have an income.
But you will be in trouble in future when you need some extra money for some reason, or when you lose your job and income.
So, just a small portion of your savings, like 10-20% of it, is the money you can afford to lose.
If you lose this money, you have to wait until you recover it through your income, and then you can invest again.
If 10-20% of your savings is not enough to invest, then you should not invest.
2. You Have to Have an Income
Having an income stream is a must.
You should not trade or invest in the stock market while you have some savings but you have no income.
What will you do if something like the China stock market crash happens again while you don’t have an income and you’ve invested your savings in the stock market?
You will lose your shirt.
Unlike what most people think, stock or currency trading are not full-time jobs.
They are just some investment opportunities.
They can’t be your full-time job and you can’t make a living with them.
You can just use them to increase your wealth.
So, before you read the rest of this article to learn why the China stock market crash occurred, make sure to follow the safest track to invest and increase your wealth: A Wealth Building Strategy to Create Wealth from Nothing
The Broad Timeline of China Stock Market Crash
The moment we discuss the China stock market crash, inevitably the reference is to the most recent and extensive lows the markets nosedived to.
Market veterans could spell trouble for a while as China entered 2015 riding on economic euphoria.
There were reports and warnings about the potential bubble in the market.
Concerns about valuations stretching beyond fair value zone became the talk of the town.
Finally, in June 2015, there were first signs of trouble in China.
The stock market bubble that has been expanding unreasonably finally popped on June 12.
In many ways that became the date on which the stock market crash in China gradually came to the foray.
Between June 2015 and February 2016, the stock market in China saw severe bouts of value erosion.
In just a month from June 2015, the Chinese A shares and the Shanghai Index lost nearly a third of their value.
But the losses in the stock market crash in China were much more than that.
The Worst Was yet to Come…
Through July, there were major aftershocks across the financial markets.
Over 1400 companies filed for a trading halt.
That was huge, comprised of more than half of the total listed entities on the Shanghai stock exchange.
The losses deepened further on Black Monday, July 27.
But the bloodbath was still ongoing.
August 24 and August 25 saw even further drop.
They became the most devastating Black Monday and Black Tuesday of the China stock market crash.
The Shanghai Index fell another 8% after three weeks of stability. It was the largest drop in the market since 2007.
The Government took several measures to arrest the fall but just about nothing seemed to be helping.
Concerns about this crisis taking on a more severe turn dominated global discussion platforms.
Most other countries worried about the possible ramifications of the severe fall on their economies and stock markets.
The Second Blow of the Stock Market Crash
The situation improved somewhat by the end of December 2015.
The stock market in China recouped some ground.
In fact, they outperformed the S&P on an annualized basis but still were way off the June highs.
The Shanghai Index ended 2015 up close to 13%.
However, January 2016 did not augur so well.
In fact, the memories of the stock market crash in China, which were just beginning to recede, came back into the forefront.
There was a steep sell-off in January.
They halted the trading twice, on January 4 and 7.
This was after a steep 7% drop within half an hour of trade kicking off.
This time it was not China alone.
The reverberations were loud and far.
This sparked a meltdown in global markets and a systematic rout set in markets across the world.
Fears of a renewed slowdown gripped the world as China reported a GDP reading below 7% for 2015.
The Chinese economy gradually understood the importance of change.
The China stock market crash was in many ways the wake-up call.
The writing was clear on the wall.
There was urgent need to shift the economy’s focus from manufacturing to services.
As the year came to a close, the Shanghai Index started 2017 with renewed vigor.
It is currently stable around the 3000 mark and has 50% more than the levels the market was at before the bubble set in.
The Chinese economy and the market are both on the mend, and the stock market is recouping losses in a gradual and phased manner.
What Caused The China Stock Market Crash?
That said, the next most obvious point to ponder is what led to this massive stock market crash.
Often the probe for the China stock market crash brings to light a systematic economic problem that set in long before the actual crash.
The problem highlights fallacy on the Government’s part, the fear factor, policy lapses.
It was a comprehensive failure of the financial system in rising to the challenges of the time and bringing about a complete revamp.
A change or improvement without it seems difficult to envisage in a sustainable fashion.
As the growth trajectory in China continued, there were doubts from several quarters about the sustainability of the above average economic growth.
Many experts felt that growth at this level could not possibly continue forever.
A slowdown was inevitable, many felt. But this was the chat in circles.
For the average citizen, the June highs are what they aspired for, and everyone wanted a piece of this pie.
More and more money continued to be pumped into the system.
As the markets continued to gain momentum, several regulatory lapses also came to the fore.
The market regulator, CSRC failed in certain areas as well.
Though the norm in China is to delist public companies that did not perform for 3 quarters, the CSRC avoided doing it.
The concern was that any type of regulatory move of that nature would disturb the upswing in the stock markets.
It is needless to mention that the quality of growth suffered.
Many stocks that did not have any right to be traded actively began to hit new highs.
Valuations began getting stretched.
Penny stocks got overvalued, and the seeds of a bubble were sowed into the system.
1. Legacy of Controls
A quick peep into China’s history would highlight that the stock market as we see it in China today emerged only in the 1990s when the Shanghai Stock Exchange reopened.
However, the pace of growth was quite fast.
By the time the new millennium set in, there were more than 1000 listed entities in China.
The market capitalization of the stocks together accounted for nearly one-third of the GDP of this economic behemoth.
Not just that, by the time 1999 started, China already had over 40 million investment accounts, more and more companies began to get listed.
It quickly grew over 2400 from 1000.
Soon enough, the market capitalization was 50% of China’s GDP, and there were 200 million active stock accounts.
In case you are wondering the connection between this growth story and the stock market crash in China, the relationship is rather deep.
Given China’s phenomenal economic growth around the same time, the growth in the stock market was an extension of the surplus cash that was generated.
However, this is the point that global markets faced their first major financial crisis in recent times.
The 2008 recession hit the markets hard.
Lehman announced bankruptcy and the domino effect spread in markets across the world.
But then, regulators worldwide decided to deal with this crisis jointly.
Stimulus packages were introduced in every major economy to boost faltering growth and economy in China against started racing towards its pre-recession targets.
The direct impact of the stimulus package was that whole the real GDP growth was closer to 7% levels; the stimulus easily helped it reach 9%.
In many ways, the bubble that led to the stock market crash in China had its origins in these developments.
2. The Government’s Role in China
The Chinese Government at this point considered that the stock market investment could support the stimulus move rather effectively.
They considered it as a great means of reinvesting into the country’s economy.
There, China began to support and rather aggressively promote stock market investment.
The Government created the “Zhongguomeng,” campaign.
Essentially, this meant a channel to drive the “China Dream.”
The thought of economic prosperity and getting a better standing in the international arena pushed the Chinese Government to promote stock market investment.
It was needless to mention that the new trades flooded the market.
More and more people tried to get a share of the stock market gains.
Almost 85% of the retail investment came to be dominated by stock market investment.
There Was Practically a Gold Rush for Stock Market Investment
- 30 million new trading accounts were created in 2015
- Hectic preparations were underway in the first 5 months of 2015
- Almost two-third of this new trading population never completed high school education
As more and more new players joined the buying frenzy, the relative risk of manipulation also increased significantly.
Momentum trades and rumor driven stock market movement started taking precedence over the rest.
Impulsive trades also led to an overvaluation of trading position.
Therefore, the bubble started getting created and eventually it is this bubble that led to the China stock market crash.
Seeing this huge demand and response to stock market investment, the Chinese regulatory body, CSRC eased up a few of the financial regulations.
The idea was to create an easy route for the passage of new inflows.
- Short selling and margin trading was allowed in select stocks
- By late 2011, more than 280 companies were authorized for short selling
- Short selling turnover rose to 0.73% from 0.01%
- Margin buys increased to a whopping 5.15%
The result- more and more traders jumped into the trading bandwagon and borrowing for trading increased significantly.
Over-leveraged positions became the norm of the day. Risky and debt funded trades became the order of the day.
The writing was almost clear on the walls; a sure and steady bubble was being formed.
China was just days and weeks away from the stock market crash at this juncture.
3. The China Stock Market Crash in 2010
But when we are analyzing the impact of the stock market crash in China, it is impossible to take forward a discussion without mentioning the huge crash in 2010.
That year the Chinese stock market posted an annual loss of nearly 15%.
The Shanghai Index ended 2010 as one of the worst performing stock exchanges globally.
This was essentially triggered by steps that were to be taken to cool the Chinese economy.
With the Chinese economy recording a 10% growth rate in 2010 and the market became nervous of steps that might be taken to curb this upmove.
The street was haunted by fears of the possible rate rise and moves to curb inflation as a whole.
What was worrying about the Chinese economy at that juncture was the downturn happened despite a decided upmove in commodity prices.
You must understand that the Chinese economy was closely linked to commodity prices at that juncture and the extent of decline was rather worrying for the overall market position.
Gold and crude were trading close to their highs and yet the Chinese economy at that point was languishing after the stock market crash.
4. The Economic Worries & Stock Market Crash
Economic worries can, therefore, be termed as one of the biggest factors for the repeated down-moves in China.
Over and over, we have seen how fears of a slowdown or regulatory policy moves have triggered losses in the stock market.
China, while on the one hand, is an economic behemoth, is also extremely susceptible to regulatory moves by the Government.
A study of the various periods of decline in the Chinese stock market clearly highlights the disturbing correlation between the economic measures adopted by the Government in China and the impact on the stock market.
5. Stock Market Crash & the RMB Impact
The RMB devaluation was one of the most important factors that led to the China stock market crash.
By November 2014, the RMB or Chinese Yuan was amongst the top 5 payment currencies.
As a result, when the crisis first began in June 2015, the Chinese authorities devalued the currency in August that year.
With the renminbi or RMB being devalued close to 2%, Chinese exports decidedly became more attractively priced.
But at the same time, overseas investment became more expensive, but the devaluation spree continued.
The Central Bank in China once again devalued it to even lower levels.
Speculations at that point of time were rife with possibilities and this uncertainty to played a crucial role in the stock market crash in China.
Several factors like higher growth in services sector, the state of heavy industries and all such factors began to be probed in identifying the potential factors that triggered the stock market crash.
China’s Currency at the Lowest Level
As the Chinese markets recorded one of its worst falls in January 2016, China’s central bank also devalued its currency to one of the lowest levels in the near-term history.
The RMB despite all the devaluation, however, continued to be one of the most used global currencies for payment.
Almost 27% Chinese goods were being transacted using the RMB. International agencies were working overtime to encourage the Renminbi to become an active international currency at par with the dollar, euro and the like.
The idea was that China would then perhaps become more responsible and look at following a market-determined exchange rate.
The expectation is that introducing a market determined exchange rate will improve the Chinese currency’s acceptance in the global markets.
It will help provide a level playing field for China’s stocks in the global market place.
The idea is to make the local markets more receptive to tackle the changes associated with the interlinking of the global currency world.
The ramifications on the economic aspects are also worth noting.
Many times, that too is an important consideration in deciding the various market triggers.
6. Economic Indicators & Impact on China Stock Market Crash
When you analyze the potential triggers that caused the stock market crash in China, economic indicators come across as one of the biggest players in the entire scheme of dealings.
Be it the inflation numbers, the manufacturing index or the simple gauge for growth, the stock market movement is very closely linked to this.
It is needless to mention that even the China stock market crash between 2015 -2016 saw a clear correlation with the variety of economic indicators that come into play.
One of the biggest monitorable in this context was the Chinese PMI.
Towards the end of 2015, the stock markets declined to the lowest levels since 2007, the PMI or the manufacturing index also showed clear signs of decline.
It fell below the psychologically important level of 50. That clearly indicated a deceleration in overall manufacturing trends.
By 2016, as the decline in Chinese markets deepen, the losses on the PMI added to the investor worry.
Manufacturing Was Undeniably to the Decline Across China
First 10 months in a row, manufacturing activity continued contracting across China.
It was also at that juncture a confirmation of slowing global growth.
A slowdown in China was undeniably a bigger worry than most other regions.
China is one of the biggest consumers of metals in the world.
A potential contraction of the various manufacturing index in the country could not augur good news for the rest of world.
Most indicators were anyway pointing towards a sustained slowdown globally.
This factor further confirmed the global trend in every possible way.
It is needless to mention that this factor played a crucial role in the extent of the decline in the China stock market crash.
When the second bout of decline gripped the Chinese markets in January 2017, the pace of downward spiral was even more sharp .
This was primarily on the back of the lower PMI reading.
The basic understanding about slowdown concerns exacerbated the losses in the market.
The worried investors were now panic- stricken and that further increased the losses.
Who’s Affected By The China Stock Market Crash?
One of the biggest outcomes of any stock market crash is the kind of losses and damage that the retail investor suffers.
The situation in 2015-2016 was no different.
They were over leveraged, inexperienced and panic stricken.
Often in times of adversity and crisis like this, they are absolutely confused and more prone to mistakes.
Foreigners were least exposed to Chinese stocks.
A mere 2% of the total traded Chinese stocks were owned by foreigners.
But the problem that affected the Chinese market post the stock market crash went deeper.
The duration and magnitude of the fall created a huge fear factor amongst investors.
Commodities like crude and copper too declined in anticipation of further value erosion.
Meanwhile, safe haven investment options like gold stocks have been affected.
The many millions of Chinese who borrowed money to enter the stock market were hit badly.
Household incomes got severely hindered, and the overall wealth erosion also was worrying.
It is needless to mention that the worst affected was the average middle-class investors.
They understood very little but often ended up being leveraged the most.
More and more of these traders suffered huge losses, and the resultant impact was worrying.
Not only it affected the average retail investors in terms of the direct stock market losses, but on the contrary, the losses are further wide reaching.
A devalued yen, contracting manufacturing growth impacted as much as the sharp losses in the stock market.
The retail investor had to deal with a double whammy of financial losses and economic contraction.
That further reduces the room to maneuver.
As a result, investors had to deal with serious implications of the declining trends globally.
The Rise & Fall of Stock Market in China
As the stock market in China is finally showing signs of stabilization, it is perhaps time to delve a little into the severe stock market crash in China.
Often people in the money market experts indicate that the China stock market crash had much deeper implications than what was obvious.
While devaluation of the Yuan and the contraction is global growth surely shared some part of the blame, it wasn’t everything.
For a deeper study, you have to go a little deeper into the pages of history.
As the markets recovered after the decline in 2010, the Government in China used the stock market for decided gains.
They used this dynamic market to boost the decline seen in the real estate market.
The huge levels of indebtedness there made the Government promote stock market investment.
Sources like margin financing and the shadow banking boosted the potential for better results.
It is needless to mention that the buying frenzy carried away the average investor.
The stock markets seemed to be moving up like a dream and no one was complaining.
But then the stock market crash in June 2015 brought in the selling frenzy in the market.
The Government Mechanism Tried to Take on a Combative Role
After all, they are the ones who convinced unsuspecting people into investing in markets actively.
The result was, they tried piecemeal measures like increasing liquidity, cutting down interest rates and easing regulation.
Nothing seemed to be helping and the extent losses just did not seem to decline.
The Government even resorted to pro-market commentaries.
Any comment discouraging people from stock market investment were dealt with an iron.
They charged several business reporters with stirring sensationalism in the market and had to apologize on state television.
But the blame game did not stop right there.
They also blamed Foreign speculators, short sellers, and even international hedge fund players.
The regulators left no stone unturned, but unfortunately, this did not help the markets very significantly.
The extent of losses continued to deepen.
The Shanghai stock index went on a downward spiral.
The extent of losses brought forth untold misery for the average investor looking to book quick profit.
The Government was hand in glove in leading people into the stock markets.
This was a major point of concern.
They eased the regulation just to maintain the market momentum.
But, this is worrying and raises the key question of the balance between state-managed intervention and the benefits of it.
The Biggest Fear Driving the China Stock Market Crash
Therefore, we can conclude that the biggest fear driving the China stock market crash is decidedly the concerns about the economy slowing down.
Temporary measures like cut in bank rates or liquidity push could boost sentiment somewhat.
But it is unlikely to provide a sustainable and long-term solution for the market.
In this context, when we are dealing with economic worries, no one really understands the exact impact or depth of the problem.
Often the steps taken are stop gap measures, and there is no assurance that it will bring forth a permanent solution.
Moreover, economies impact each other globally today.
The ramifications of a slowdown in China could be far and wide, and often the stock market crash is indicative of this fear factor as well.
Therefore, a deeper study of the economic realities of China is important.
Only that will provide a sustainable option to deal with the damages due to the China stock market crash.