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Shanghai Stock Market Crash

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Eriss Donaldson

on 31 July 2015

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Transcript of Shanghai Stock Market Crash

Shanghai Stock Market Crash
July 2015

The Shenzhen Composite is an index used to measure A-Share & B-Share lists on the Shenzhen Stock Exchange.
Mechanism (Models)
Government Intervention
Money Supply Market:
Monetary Injection
6. MS decreases so people less able to buy g/s
7. Reduces quantity demanded of g/s (Y)
8. Shift AD left
Money Supply Market: During Crash
Investors
*Most of those affected by the plummet of the stock market are first time investors who do not have a college degree.
*A fair amount of these investors borrowed the money they put into the stock market.
The Shanghai Composite has lost 32% in stocks.
The Shenzhen is down 41%.
Around 1,430 of the 2,776 trading companies in China have pulled their shares from the stock market.
Thhe Shanghai Composite Index dropped 8.4% (steepest since 2007).
Shenzhen Composite worth $4 trillion
Shanghai Stock Market worth $5.9 trillion.
Pre-Crash
1. MS shifts left
2. Less money lend
3. Interest rate increases
4. Discourages borrowing
5. QD of money decreases
1. Gov. increases MS with policies totaling in $500 billion
2. MS shift right
3. More money to lend
4. Interest rates decrease
5. Encourages borrowing
6. QD of money increases
7. MS increases so people able to buy g/s
8. Increases quantity demanded of g/s (Y)
9. AD shifts left

China Securities Regulatory Commission (CSRC) imposed a six-month ban on stockholders
1,300 total firms, representing 45 percent of the stock market, suspended the trading of stocks
Large mutual funds and pension funds pledged to buy more stocks.
The government gave cash to brokers to buy shares, backed by the central-bank
Implemented Policies to Increase MS

If the market continues to plummet, more investors will seek to invest in U. S. assets.
The U.S. dollar has gained 3% in value.
US Free float value is about 1/3 of China's GDP..
In the longer term, this could also hurt places like Australia, which supplies a lot of China's raw materials.
The most at risk include : tech hardware manufacturer Qualcomm and restaurant operator Yum, (fast food stalwarts KFC, Taco Bell, and Pizza Hut) both generated more than half their sales from china last year.


What about Chinese people?

It's ordinary Chinese that have been the biggest victims of the crash.

Millions of them piled into the market after regulations were loosened on margin trading -- borrowing money to invest.

- Stocks only make up 15% to 20% of Chinese households' wealth.

- But stocks declined, this lead to a broader fall in confidence

- People become more risk averse
Today it is estimated that China has lost about $3.25 trillion (more than the value of France's stock market).
Possible Explanation
Share prices were ahead of growth and the profits of companies.
Implications
Since January 1st the Shanghai Market rose 60% & the Shenzhen Composite rose 120%.
China was the world's best performing market in June.
About 81% of investors traded at least once a month.
People respond to incentives
The People's Bank of China has cut interest rates to an all time low.
Brokerage firms have committed to buying billions worth of stock.
China & the Global Economy
China's Economy Today
Eriss Donaldson
COL '19
Mireya Iglesias-Ayala
MSB '19
Carolina Sosa
SFS '19
Alexis Jones
SFS '19
7/30/2015
Worse than Greece?
China’s total stock market loss since mid-June is roughly the equivalent of 9 Greece economies.


Differences:
Stock market wealth is not like GDP, or economic wealth.
Economic wealth is created, passed along, and spent elsewhere.
Stock market wealth can boost spending, but it tends to mostly stay in markets
Greece's economy is decreasing, while China's still grows
Full transcript