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

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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