China Stock Market Crash
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Transcript of China Stock Market Crash
China Stock Market Crash
Group Members:1. AayushAjmani (1)2. Keshav Sharma (27)3. Jasmine Kaur (25)4. Sagar Jain (51)5. Samarth Dargan (52)
Stock Exchanges of China
Hong Kong Stock Exchange
Oct-93
Apr-94
Oct-94
Apr-95
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Apr-96
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Apr-15
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Chinese Yuan / Dollar Chinese Yuan / Dollar Yuan pegged to $; China
begins running current account deficit.
Plans for Floating scrapped after Asian financial crises. Stabilizing during global
financial crises.
Reserve requirement ratio (RRR)
FEB’15 : The People’s Bank of China just cut the reserve requirement ratio (RRR) for banks
China Money Supply
1 •Since 2008: China pumped 4 trillion yuan into its economy to protect it from the fallout.
2 •GDP Increases -> Hot Money Inflows•Increase in demand of yuan
3 •PBoC had to buy even more dollars to prevent surging yuan demand from driving up the local currency’s value.
Government pumped the stock marketGrowth
Slowed Down
China Debt $28 Trillion
Government pumped the stock market
Economist ,American Enterprise Institute
Hey, why not address our huge problems by
replacing debt with equity?
A bull market would help indebted companies raise new capital and pay off overdue loans. But eventually the market tanked.
Government launched a sweeping stock market bailout, vowing to prop up the Shanghai Composite Index until it hit 4,500. The problem is, every time it has neared that target level, investors start selling in anticipation that the government will pull back its support.
Hot money fled the countryPeople started
selling the yuan
PBoC had to keep the yuan’s value stable (Part of IMF Basket)
PBoC started selling dollars from its
precious reserves in exchange for yuan
Buying back yuan lowered
liquidity
raised borrowing costs deflation
CHINA’s Reaction to
Stock Market Crash
Impact of Crash on Chinese Economy
3 trillion $ lost – 10* yearly military expenditure10* GDP of Greece
Most of these accounts are funded to people taking on debt to buy stocks.
The country’s exports crashed by 8.3% yoy
Only 13% of the Chinese population participate in the stock market, the impact is considered to be limited.
Beijing's Reaction
China Securities Regulatory Commission (CSRC) imposed a six-month ban on stockholders owning more than 5 percent of a company's stock from selling those stocks, resulting in a 6 percent rise in stock markets
2 Ban on major stockholders to sell Shares
Chinese Central Bank also lend 260 billion renminbi to major brokerage firms via the China Securities Corporation, thereby avoiding a scenario in which the firms ran out of liquidity.
1 Provide more cash to China security Finance corporation
3
Suspension of initial public offerings and a further relaxation of the rules governing insurance companies’ stock purchases.
The move triggered an immediate, significant depreciation of the Chinese currency by 1.96% suggesting Beijing's intention was to depress the currency to boost exports and support the domestic economy.
People’s Bank of China (PBOC) announced its decision to liberalize the RMB reference rate.
Why focus on the currency’s value?
China’s exchange rate is pegged to a basket of currencies but can fluctuate within a +/- 2 percent band on either side
China's central bank had used the CSFC as a conduit to help Chinese people buy stocks with borrowed funds, helping to prop up stock market prices. The authorities probably hoped that after a month of doing this, the stock market had stabilized enough to make further support unnecessary.
Theories of ‘opposites’
Consumption-led growth
Export-led growth
The lowering of the exchange rate of the Yuan are steps towards making it convertible and one among the basket of currencies to which other currencies are pegged and changing over to a consumption-led growth rather than an export-led growth.
1 2Chinese stock market collapse indicates a structural crisis of the Chinese economy.
The collapse is similar to the US housing bubble, Since the real estate that has been built is far in excess of what can be realistically bought, this will lead to a collapse of the real estate market leaving the financial system with huge bad debts.
In this view, the lowering of the exchange rate of the Yuan is an attempt to reflate the Chinese economy, make their exports more competitive and escape from this impending crisis.
Middle-income trapInvestment is extraordinarily high relative to the domestic consumption part of its GDP.
Regression analysis on various stock indices w.r.t. Chinese stock index
*Stock index data used for 2014-2015**Source: www.quandl.com
Stock Indices Multiple R R Square Adjusted R Square Standard Error ObservationsNasdaq 0.8988 0.8079 0.8074 147.92 400Dow Jones 0.7940 0.6305 0.6296 417.96 400Bovespa Brazil 0.0232 0.0005 -0.0022 3669.32 364RTSI Russia -0.6711 0.4504 0.4490 146.08 403BSE India 0.6167 0.3803 0.3787 1874.56 382South Africa 0.0854 0.0073 0.0049 57.91 412Singapore 0.3917 0.1535 0.1514 32.66 412
Emerging Markets and World
1500 2000 2500 3000 3500 4000 4500 5000 55001400014500150001550016000165001700017500180001850019000
R² = 0.627490300997248
Dow Jones1500 2000 2500 3000 3500 4000 4500 5000 55000
1000
2000
3000
4000
5000
6000
R² = 0.807921100259175
Nasdaq8.04 % of China’s Imports from
USA
9.3 % of USA’s exports to China
In all, Chinese companies have invested $46 billion in the United States since 2000, with most coming in the last five years, according to a study prepared by the Rhodium Group, a New York research firm
USA
Brazil
1500 2000 2500 3000 3500 4000 4500 5000 55000
10000
20000
30000
40000
50000
60000
70000
R² = 0.000483198999855383
Bovespa Brazil
2.93 % of China’s Imports from Brazil
17 % of Brazil’s exports to China
Russia
1500 2000 2500 3000 3500 4000 4500 5000 55000
200
400
600
800
1000
1200
1400
1600
R² = 0.449972327724645
RTSI Russia
2.7 % of China’s Imports from Russia
8.1 % of Russia’s exports to China
South Africa
2.18 % of China’s Imports from Singapore
14 % of Singapore’s exports to China
Singapore
1500 2000 2500 3000 3500 4000 4500 5000 55000
200
400
600
800
1000
1200
1400
R² = 0.00690882156979211
South Africa
0.69 % of China’s Imports from South Africa
8.3 % of South Africa’s exports to China
1500 2000 2500 3000 3500 4000 4500 5000 55000
200
400
600
800
1000
1200
R² = 0.147247862580857
Singapore
1.14 % of China’s Imports from India
5.8 % of India’s exports to China
1500 2000 2500 3000 3500 4000 4500 5000 55000
5000
10000
15000
20000
25000
30000
35000
R² = 0.380215413740632
BSE
India
Although, a good opportunity for India to shine, as it is the next fastest growing economy after China
Hit on the reputation of emerging markets in the eyes of potential investors
Not stock index crash, but slowing economy is a concern for emerging
markets and the world
Conclusion for emerging markets and world
"I'm telling clients to avoid emerging markets completely, to hold cash or cash equivalents wherever possible," Smith, who left Deutsche Bank last year to start an independent research firm, Ecstrat, said in an interview. "I can see reasons why we might stabilize in the short-term, but would I personally go back into emerging markets at the present? Absolutely not.“
China is a drastically important company to the world economy. The country imports more than $1.4 trillion of goods yearly from across the world. Chinese consumers have been helping to boost the world economy with their spending as more and more Chinese reach the middle class.
Short Term Impact
A slowdown in the Chinese economy isn’t a terrible
event when you consider that Modi is trying to
attract manufacturers with his Make in India pitch
-Milan Vaishnav, Carnegie Endowment for
International Peace
IMAPCT ON INDIAN GROWTH STORY
SHANGHAI COMPOSITE INDEX
Nearly 30 percent of active traders in India's stock market are Foriegn Portfolio Investors: continue to sell shares in
immediate future from panic in the global markets
Hard Hit Sectors
• Crud Oil Cairn India shares closed 6.5 per cent lower at Rs. 168• Automobile Sector Tata Motors shares declined 6.2 per cent to Rs. 404.95
Cheaper Infrastructure• Copper and Aluminum trading is at
an all time low as China was the world’s largest consumer
• Copper prices hit their lowest level in six years
Cheaper Input imports from China • Eg. Mobile Phones Cheaper• Tyre companies took a hit of up to
12.5 per cent
Fuel May go DownSaving of $70 billion (Rs. 4.60 lakh crore) has reduced the current account deficit (CAD) to 1.3 per cent of GDP from 2014
IMAPCT ON INDIAN ECONOMY
IMPACT ANALYSIS
Cheap global crude and commodity prices mean LOWER imported component of inflation. Impact is visible in the WHOLESALE price index, showing negative growth for nine consecutive months
• Flooding of Indian markets with cheap Chinese goods
• Negative affect on manufacturing and exports
• Oil prices already low because of a global slowdown and the possible Iran-US nuclear deal
• Low oil prices can help the Indian government control its deficit and check inflation
IMAPCT ON CURRENCY AND COMMODITIES
Prices of gold have slipped to a four month low in expectation that the present meltdown will spill over to the gold marketFall in global prices of gold was witnessed
China imported 36% more gold both on a year-on-year and month-on-month basis, suggesting investors are parking their money in safe havens and hence uprward price movement is evident
Long Term TrendCurrent Trend
CHINA
INDIA
Emerging Markets
Lack of trust in Chinese economic
management
contagion effect;capital flight
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
buyStock growth is
surpassed 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
Coefficient
sStandard
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