8/2/2017 How China's stock market bubbled ...

then burst

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How China's stock Quote Lookup

market bubbled ... Recently Viewed

then burst
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Andy Serwer
Yahoo Finance July 30, 2015
What to Read Next

As you may have noticed the Chinese stock marketDonald Trump's Favorite Poll Found His
Approval Rating Plunged to an All-Time Low
has been going haywire lately, causing stocks in the
Newsweek
U.S. and around the world to gyrate wildly. Why did
the Chinese market go up so much and then go way
down? Why is it affecting the market here? How much
damage could Chinese turbulence cause to the U.S.
And where do Chinese stocks go from here?

Much of the turmoil is actually the result of the

Chinese making huge changes in their economic
policy and financial regulations.
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The Chinese government is trying to undertake a The Leadership Blueprint Sponsored
great number of reforms at once, says Bob Hormats,
a former Goldman Sachs (international) vice-chairman
and a one-time Under Secretary of State for
https://finance.yahoo.com/news/gauging-the-global-implications-of-china-s-manic-stock-market-225719655.html 1/8
8/2/2017 How China's stock market bubbled ... then burst

Economic, Business, and Agricultural Affairs. They

want market forces to have an bigger role (in) driving
their economy and in that process theres bound to be
some big bumps in the road. By big bump Hormats is
referring to the recent wave of selling in Chinese
These Charts Paint A Long-Term Bullish Picture
stocks highlighted by an 8.5% plunge this past
Chris Ciovacco's Tumblr
Monday. The Chinese government has tried to stop
the slide by buying stock in Chinese companies and
by limiting the sales of shares. Perhaps that plan
worked, perhaps not. In any event the Chinese market
has stabilized by midweek. But traders fear that more
selling is in the offing and that government action
could prove to be ineffective. On the other hand,
maybe Chinese stocks are due for a run up. Did I
mention that before the selloff, Chinese stocks hadAlphabet Inc (GOOGL) Stock Has Run Its
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To understand how the Chinese market came to this

place, heres some context: First, when you hear
commentators talk about the Chinese stock market,
they usually mean the Shanghai Stock Exchange, now
one of the world's biggestranked by the total value
of the companies on each exchange. (China has two
other exchanges, the older Hong Kong Exchange and
the smaller Shenzhen Exchange, but lets stick withBuy Teva Pharmaceutical Industries Ltd (ADR)
the Shanghai because thats where the action has (TEVA) Stock Before Q2 Earnings
InvestorPlace
been.) The Chinese government founded the
Shanghai Exchange in 1990 as part of that overall
strategy of opening up its financial markets. Over the
years the exchange has had a number of crazy spikes
and huge drops, not surprising for a burgeoning
market. But now China is the second biggest economy
in the world and so when its stock market goes crazy,
there are global implications.

The Chinese government had several objectives when
trader Sponsored

it created the exchange; it wanted to give ordinary

Chinese citizens a homegrown place to put their
money other than banks or real estate and it wanted to
provide Chinese companies with a source of funding
other than banks. But the government wanted to
control the exchange, so it limited the amount that
foreigners could invest and the amount of money
investors could borrow to purchase stock. The plan
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8/2/2017 How China's stock market bubbled ... then burst
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was to loosen those regulations gradually to make Buy
the Chesapeake Energy Corporation (CHK)
Stock If You Trust Energy Prices To Rise
market
Search formore open.
news, And in
symbols or fact the Chinese did slowly
companies Search
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loosen the reins, but more recently they accelerated
the process, which is when the trouble came in.
Finance Home Originals Events Personal Finance Technology Markets Industries

Its almost a contradiction in terms, says Nicholas

Platt a former US Ambassador to Pakistan and the
Philippines who as a young diplomat accompaniedMore than 6,300 stores are shutting down
here's
Richard Nixon on his historic 1972 trip to China. Its a the full list
Business Insider
free stock market in an economy that the state is really
trying to control. I pondered how much China has
changed in those forty-plus years and asked Platt
what Chairman Mao would have thought about
Chinas wild and crazy stock market. He would have
found it extremely distasteful, Platt told me.

In early November 2013, Chinese President Xi Jinping

convened what is called the Third Plenum, which isAfter 10 years as a financial planner, I've
the third meeting of the Communist Partys Centralrealized almost everyone gets the same thing
wrong about money
Committee. (There is usually one Plenum per year,
Business Insider
and the third is the most important because it is often
the showcase for a new leaders agenda, as it was in
this case.) President Xi introduced a number of
political, social and economic reforms, including
measures that accelerated the opening up of the
Shanghai Exchange. More foreigners could invest,
and more borrowing was allowed too.

Want To Make Money On Your Way Home From

The result was that the Shanghai Composite, whichWork?
tracks shares trading on the exchange, began to 70Trades Sponsored

climb. Slowly at first, and then on November 17 2014 a

critical measure was implemented that allowed $3.8
billion in daily cross-border orders between the Hong
Kong and Shanghai exchanges. That set off a frenzy
of buying. Between that day in November to its peak in
mid-June, the Shanghai Composite roared ahead
110%, meaning it more than doubled in eight months.
This while U.S. stocks rose a paltry 1.1% and while
the rate of growth of the Chinese economy was
actually slowing down.

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8/2/2017 How China's stock market bubbled ... then burst

The Chinese government realized they had a problem.

They had created a monster in the Shanghai
Exchange by allowing hot money to flood in. Traders,
realizing the run-up was unsustainable, rushed to the
exits sending the Shanghai Composite down a gut-
wrenching 32% in 18 days despite China's best efforts
to stem the selling. A market rout of this magnitude
naturally caused nervousness in markets around the
world, which is why stocks took a hit in all major
markets including the U.S. The actual damage to the
U.S. markets and economy is more psychological than
anything else, unless the decline in Chinese stocks
causes the Chinese economy to fall off a cliff, which
both Hormats and Platt think is unlikely.

Only a small portion of Chinese own stocks, says

Hormats, so the effect is limited. And the market is still
way above where it was last year at this time. But he
says, You can bet the Chinese are working furiously
to figure it out. One things for sure, they will learn from
this. Still no one knows where Chinese stocks are
headed.

The long-term implications for the Chinese

government could be risky. If youre focusing on
freeing the economy and have an authoritarian
government, sooner or later if your economic reforms
are successful, it will [increase] pressure for political
reform, says Platt. That need not take the form of a
multiparty system, but it means the system will have to
be more open and more directly responsive.

The Chinese may find out that there are limits to how
much a government can control. Or they may teach us
that they know a thing or two about balancing acts.

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