the Chinese share market crash in perspective and what it means to the rest of the world

15 July 2015

For the year to 30 June 2015, the Chinese share market has risen 150%

However, in the last four weeks, the Chinese share markets have fallen 30%.  $3 trillion US dollars in value has been wiped off the share markets.

The Chinese share market as it stands today is a relatively young phenomenon

China’s share markets resumed trading 25 years ago, as part of the Deng Xioaping economic reforms in the 1980’s and the current Shanghai Stock Exchange started trading in December 1990. The Shenzhen Stock exchange opened in July 1991.

Chinese shares are also listed through the Hong Kong stock exchange (called H shares)

The number of foreigners allowed trading licenses on the Shanghai and Shenzhen Stock exchanges is very limited and highly regulated.

Many shares are only available to Chinese residents, and these are called “A” shares. Many companies also offer “B” shares, which are available to both Chinese buyers and foreign buyers. They are often denominated in US Dollars as opposed to Chinese Renminbi. Chinese shares are also listed through the Hong Kong stock exchange and are called “H” shares.

Most international investors buy and sell Chinese stocks as “H” shares through the Hong Kong exchange

With the rise of the Chinese middle class, and the fact that Chinese property prices were very high and not good value for money, many Chinese people were investing in the Chinese share market.

I have seen estimates that 98% of all shares on the Shanghai and Shenzhen exchanges are owned by Chinese residents.

Many Chinese people are also borrowing money to buy shares, based on the extraordinary returns of the markets over the last year. And the source of the lending is the Chinese broking houses! They have facilities to lend money to people to buy shares.

Until April 2015, individual traders (Chinese residents) were only allowed to have one trading account with one brokerage firm. However, this rule was relaxed in April, and suddenly, people were opening multiple accounts with multiple broking, and multiplying their borrowing .

Gambling is officially illegal in China. However, it is well known that Chinese people love to gamble. The casino mecca of Macau, on a Portuguese island, is 65 kms from Hong Kong and was set up to attract visitors from Mainland China. It is an extremely popular tourist destination for Chinese gamblers.

With the liberalisation of trading accounts for the stock exchange, it seems that the Chinese people have taken to their share market like a gambler to a blackjack table.

Another interesting phenomenon is that the share prices of the SAME shares have varied hugely in 2015 between the various exchanges.

“H” Shares have generally been trading at a 20% discount against “A” and “B” shares for the same companies listed on the 2 Chinese stock exchanges.

Obviously, this demonstrates that there has been much more of a demand on the Chinese mainland for shares as opposed to the “H” shares, which are mainly accessed by foreigners and residents of Hong Kong. This has also created buying opportunities for foreign investors.

In the last week, the Chinese Government has stepped in to regulate trading on the Shanghai and Shenzhen exchanges. They have ruled that investors who hold more than 5% of a listed company’s shares are not allowed to trade any of their shareholding for 6 months.

This will reduce the number of people who can trade shares and may halt the slide of the markets. Many Chinese companies have also voluntarily suspended trading of their shares.

At the end of last week, just under half of the companies that trade on the main board have suspended share trading.

Certainly, a lot of the shares have been the hardest hit with falling values are the more speculative shares that are traded on the Shenzhen stock exchange, and most of the people selling shares are Mum and Dad investors.

There has been a stampede for the gates. But many of the larger companies (that are more likely to be owned by foreign investors) have not fallen in value to the extent of the smaller, more speculative stocks.

What does this mean for the rest of the world?

The general consensus is that it doesn’t actually mean a lot and is unlikely to have much of an impact on global markets.

Foreigners do not buy and sell on the Chinese stock exchanges. They tend to trade on the Hong Kong exchange and this exchange has not fallen to the extent that the mainland China exchanges have.

Globally, there is not a significant exposure to Chinese shares because they are quite difficult to access.

Most of the individual people who have currently lost money in the last few weeks will probably still be well into positive territory overall.

Share markets have fallen back to March 2015 levels

It is only investors that have entered the market since March 2015 who will have actually made a loss. And hopefully, these are people from the middle and upper classes, and they can absorb a loss of capital with their future earnings.

It is very reassuring that the large cap stocks (including bank stocks) have fared better in the sell-off, which indicates that the fundamentals of the market are still reasonably strong.

To be fair, the recent events are probably a positive thing.

The Chinese market is an emerging economy, and there has been and will continue to be growing pains as they move towards being a developed economy.

Hopefully, this “crash” will encourage the Chinese investors towards more rational long term behaviour.

Certainly, there are now good buying opportunities in the Chinese markets for the wise and rational to take advantage of.