Way Ahead

China Stock Hidden Problems

Low foreign investment in stock market

Too big to

fail a

ssumption

Expir

ation

of Ch

ina an

d WTO

cont

ract

Mar

gin

buy

Stock growth is surpasse

d economy growth

Bullish propaganda by China's state-run media

Geog

raph

ical Is

sue

China Economy

and

Stock Market

China Stock Market Way Forward

Government Stock Purchase

Reduction of Interest Rate

Availability of capital

Restriction in Stock Market Trading

Devalue Yuan

Increase in demand of stocks

Stock prices increases

Investors confidence increase

Market revive back

Increase in government spending

Increase Taxes to stabilize spending

Decrease in purchasing power

Fall in standard of living

Investors start to sell their shares

Stock market fall

Government Buy Stocks

Optimistic View Pessimistic View

Increase in demand of stocks

Investors confidence increase

Borrowing becomes cheaper

Stock market returns relatively improves

Individual borrow funds & invest in stocks

Market revive back

Reduction of Interest Rate

Optimistic View Pessimistic View

Return on investment decreases

Lenders looks for other avenues

Lending decreases

Reduction in margin trading

Investors start to sell their shares

Stock market fall

Increase in demand of stocks

Stock prices increases

Investors confidence increase

Individual borrow funds & invest in stocks

Market revive back

Increase in Availability of Capital

Optimistic View Pessimistic View

The practice of borrowing money to buy stocks. Or buying on margin is incredibly risky

When stocks started to fall

Investors quickly sell their investments to pay back the loans

This fuel an even bigger drop in stock prices

Restriction in Stock Market Trading

Optimistic View Pessimistic View

Increase in stability & limited trading option

Demand for trading stocks increases

Stock prices increases

Investors confidence increase

Market revive back

Asymmetry of information

Reduction in rate of stock demand

Market grow at slow pace

Big shareholders increase the selling

Stock market fall

Big shareholders can't sell for 6 months, Limited Stock Trading

Purchasing power increases

Investment in stock increase

Stock prices increases

Exports become cheaper

China export increase & Economy Grow

Market revive back

Devalue Yuan

Optimistic View Pessimistic View

Exposure for foreign investor increases

Foreign trading decreases

Asymmetry of information

Foreigners looks for other avenues

Growth reduces

Devalue Yuan Impact

Regression StatisticsMultiple R 0.534668R Square 0.28587Adjusted R Square 0.279919Standard Error 441.2905Observations 122

ANOVA

df SS MS FSignificance

FRegression 1 9354537 9354537 48.03669 2.25E-10Residual 120 23368480 194737.3Total 121 32723016

CoefficientsStandard

Error t Stat P-value Lower 95% Upper 95%Lower 95.0%

Upper 95.0%

Intercept 30791.09 3852.048 7.993433 9.15E-13 23164.3 38417.87 23164.3 38417.87X Variable 1 -4282.95 617.9547 -6.93085 2.25E-10 -5506.46 -3059.44 -5506.46 -3059.44

Analysis of Chines Stock Index and Dollar-Yuan Exchange Rate (Dollar to Yuan)

*Stock index data used for 16 Mar 2015 – 7 Sep 2015**Source: www.quandl.com** Souce: www.exchangerates.org.uk

X= Exchange RateY= Closing Stock Index

Fall in economy

Foreign and domestic

investment flow out of economy

Reduction in availability of funds

Stock market fallDecrease in

investment in stock market

Cost of production increases

China and WTO agreement ends on 1 January 2016

Reduction in government subsidiary

Expiration of China and WTO Contract Impact

• CNN Money• Investopedia• The Hindu• www.exchangerates.org.uk• www.quandl.com

Sources