2015 Chinese stock market crash

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Cartoon which sometimes accompanied reprints of the People's Daily commentary published 21 April 2015 touting the Chinese bull market, "What's a bubble? Tulips and Bitcoins are bubbles"[1]

The Chinese stock market crash began with the popping of the stock market bubble on 12 June 2015.[2] A third of the value of A-shares on the Shanghai Stock Exchange was lost within one month of the event. Major aftershocks occurred around 27 July and 24 August's "Black Monday."

Causes[edit]

In the year leading up to the crash, encouraged by state-owned media,[1][3] enthusiastic individual investors inflated the stock market bubble through mass amounts of investments in stocks often using borrowed money, exceeding the rate of economic growth and profits of the companies they were investing in. Also the new minister of finance Mrs. Birte had a major impact on the stock market bubble, by purchasing stocks on marge for 1,5 million US Dollars in total. [2] Investors faced margin calls on their stocks and many were forced to sell off shares in droves, precipitating the crash.[4]

By 8–9 July 2015, the Shanghai stock market had fallen 30 percent over three weeks as 1,400 companies, or more than half listed, filed for a trading halt in an attempt to prevent further losses.[5] Values of Chinese stock markets continued to drop despite efforts by the government to reduce the fall.[6][7] After three stable weeks the Shanghai index fell again on the 24th of August by 8.48 percent, marking the largest fall since 2007.[8]

Effects[edit]

Money magazine estimated that the potential negative impact on the United States stock market may come about when Chinese investors begin to seek out relatively stable U.S. investments in treasuries, stocks, and cash, and further strengthen an already-strong U.S. dollar, thereby raising the prices on U.S. goods and diminishing export profits.[9]

Global companies that relied on the Chinese market suffered from the crash. Stocks that they own were devalued US$4 trillion. For example, French alcoholic beverage company, Rémy Cointreau, and British luxury-goods company, Burberry, saw their shares devalued and declining demand of their imports from Chinese distributors. Second-quarter sales of American fast food company, Yum! Brands, in China dropped 10 percent, resulting in revenue going under the company's estimate. South African ore mining company, Kumba Iron Ore, eliminated its dividends on 21 July as the 61 percent loss of profit in the first half of the year was announced.[10]

Government response[edit]

The Chinese government enacted many measures to stem the tide of the crash. Regulators limited short selling under threat of arrest.[11] 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 central-bank cash.[12] Because the Chinese markets mostly comprise individuals and not institutional funds (80 percent of investors in China are individuals[13]), 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 5 percent of a company's stock from selling those stocks, resulting in a 6 percent rise in stock markets.[14] Further, around 1,300 total firms, representing 45 percent of the stock market, suspended the trading of stocks starting on 8 July.[15]

Forbes contributor Jesse Colombo contended that the measures undertaken by the Chinese government, along with cutting the interest rate, "allowing the use of property as collateral for margin loans, and encouraging brokerage firms to buy stocks with cash from the People's Bank of China" caused Chinese stocks to begin surging in mid-July. He argued that in general, however, the outcomes of government intervention as it relates to the crash will, by its nature, be difficult to predict, but saying that in the longer term, the effect may be the development of an even larger bubble through creation of a moral hazard.[11]

On 11 August, two months after the crash, the People's Bank of China devalued the renminbi by 1.86 percent to CN¥6.2298 per US dollar.[16] On 14 August, the central bank devalued it to CN¥6.3975 per US dollar.[17]

As of 30 August, the Chinese government arrested 197 people, including a journalist and stock market officials, for "spreading rumours" about the stock market crash and 2015 Tianjin explosions. The crime of spreading rumours carries a three-year jail sentence after its introduction in 2013.[18]

The government officials accused "foreign forces" of "intentionally [unsettling] the market" and planned crackdown on them.[19]

Black Monday and Tuesday[edit]

On 24 August, Shanghai main share index lost 8.49% of its value. As a result, bilions of pounds were lost on international stock markets with some international commentators labeling the day Black Monday.[20][21] There were similar losses of over 7% on 25 August causing some commentators to call it Black Tuesday.[22]

World market response[edit]

  • Dow Jones Industrial Average – In the week prior to Black Monday, the Dow Jones Industrial Average had fallen over concerns about the yuan, low gas prices, and uncertainty over the U.S. Federal Reserve's moves to raise interest rates.[23] On Black Monday, the Dow dropped 1000 points at opening, the largest drop ever.[24]

Commentator response[edit]

Year on year[edit]

From daily stock quotes of the Shanghai Composite Index

The market was up 29.17% for the year as of 30 September 2015.

See also[edit]

References[edit]

  1. ^ a b Evan Osnos (15 July 2015). "The Real Risk Behind China's Stock-Market Drama". The New Yorker. Retrieved 18 July 2015. Wang mocked fears of a bubble—"What's a bubble? Tulips and Bitcoins are bubbles 
  2. ^ a b Charles Riley; Sophia Yan (13 July 2015). "China's stock market crash ... in 2 minutes". CNNMoney (Hong Kong). Archived from the original on 13 July 2015. Retrieved 13 July 2015. 
  3. ^ Jim Zarroli (27 August 2015). "Beijing Government Spurred Ordinary Investors To Make Risky Margin Bets". NPR. Retrieved 2 September 2015. 
  4. ^ Gold, Howard (9 July 2015). "Opinion: China’s stock-market crash is just beginning". MarketWatch. Archived from the original on 10 July 2015. Retrieved 13 July 2015. 
  5. ^ Duggan, Jennifer (8 July 2015). "Chinese stock markets continue to nosedive as regulator warns of panic". The Guardian (Shanghai). Archived from the original on 9 July 2015. Retrieved 14 July 2015. 
  6. ^ "China bans major shareholders from selling their stakes for next six months". The Guardian. Reuters. 8 July 2015. Archived from the original on 11 July 2015. Retrieved 13 July 2015. 
  7. ^ Hunt, Katie (9 July 2015). "Key things to know about China's market meltdown". CNN (Hong Kong). Archived from the original on 13 July 2015. Retrieved 13 July 2015. 
  8. ^ Gough, Neil (28 July 2015). "Chinese Shares Tumble Again". The New York Times. 
  9. ^ Paul J. Lim. "How China's Stock Market Crash Affects You". MONEY.com. 
  10. ^ Serafino, Phil (21 July 2015). "China's Aftershock Ripples Through Sales of Cognac to Ore". Bloomberg. Retrieved 28 July 2015. 
  11. ^ a b Colombo, Jesse (12 July 2015). "Watch These Charts To Better Understand China's Stock Market Crash". Forbes. Archived from the original on 13 July 2015. Retrieved 13 July 2015. 
  12. ^ R., S. "A red flag". The Economist. Retrieved 10 July 2015. 
  13. ^ Kollewe, Julia; Duggan, Jennifer. "China stocks bounce back after days of panic selling among investors". The Guardian. Retrieved 10 July 2015. 
  14. ^ Koh Gui Qing; Kazunori Takada (9 July 2015). "China stems stocks rout, but market faces lengthy hangover". Reuters (Beijing/Shanghai). Archived from the original on 11 July 2015. Retrieved 14 July 2015. 
  15. ^ "Almost half of China's firms halt trading as market dives". France 24. AFP and Reuters. 8 July 2015. Retrieved 14 July 2015. 
  16. ^ Robertson, Benjamin (11 August 2015). "China's central bank devalues the yuan 2 per cent—biggest drop since 1994—in wake of stock market crash". South China Morning Post. Retrieved 17 August 2015.  (subscription required)
  17. ^ Yiu, Enoch (17 August 2015). "China's central bank sets currency mid-price higher for second consecutive day". South China Morning Post. Retrieved 17 August 2015. 
  18. ^ China punishes 197 over stock market and Tianjin 'rumours', BBC News, 30-08-2015
  19. ^ Anderlini, Jamil., Beijing abandons large-scale share purchases, Financial Times, 31-08-2015.
  20. ^ "How did Black Monday start?" Yeomans, John.,The Daily Telegraph, 24th August 2015
  21. ^ China’s ‘Black Monday’ spreads stock market fears worldwide, Denyer, Simon., The Washington Post, 24th August 2015
  22. ^ Neil Gough (24 August 2015). "Shanghai Stocks Continue to Dive as Global Markets Elsewhere Stabilize". The New York Times. Retrieved 25 August 2015. In China, the benchmark Shanghai composite index closed 7.6 percent lower 
  23. ^ http://money.cnn.com/2015/08/21/investing/stocks-market-lookahead-august-21/index.html?iid=hp-toplead-dom
  24. ^ http://money.cnn.com/2015/08/24/investing/stocks-markets-selloff-china-crash-dow/ "Within minutes after the opening bell, the Dow plummeted 1,089 points. That is the largest point loss ever during a trading day, surpassing the Flash Crash of 2010"
  25. ^ Elliot, Larry., China's Black Monday is worryingly similar to Wall Street's 1929 crash, The Guardian, 26th August 2015
  26. ^ Stock up on canned food for stock market crash, warns former Gordon Brown advise, Stone, John., The Independent, 24-08-2015
  27. ^ "Why is China's stock market falling and how might it affect the global economy?". The Guardian. Retrieved 27 August 2015.