China Stock Market

An Analysis of Shanghai Stock Exchange Movement in 2000-2007: Is It A Bubble Pattern? Liu Pei Septian Hario Seto Simon Huang He

Agenda
Overview: Recent China Economic Indicators
Structure And Development Of China Stock Market
Recent Movement Analysis On Shanghai Stock Exchange
Stock Bubble And Its Pattern

Structure and Development of Shanghai Stock Exchange

Topic To Be Discussed
Overview of China Recent Economic Indicators
Structure and Development of Shanghai Stock Exchange

GDP Growth and CAB to GDP Ratio

Increase Inflationary Pressure…

Tightening Monetary Policies

Negative Interest Rate…
November year on year inflation rate announced by National Bureau of Statistic of China in 6.9% Vs 6.48 % interest rate on 6 month deposit rate  Negative interest rate.

Shanghai Stock Exchange (SSE)
Founded on Nov. 26th,1990
Non-profit-making membership institution
Most preeminent stock market in Mainland China

Type of shares
A share dominated in Yuan. Listed in Shanghai and Shenzhen Stock Exchange. Initialy listed in Nov 1984.
B share dominated in US Dollars. Listed in Shanghai and Shenzhen Stock Exchange. Initialy listed in 1992 Feb.
H share dominated in HKD, listed in Hongkong Stock Exchange, initialy listed in 1993.

More Details About A Shares
State-owned shares.
Takes most weight, non tradable.
Corporation stocks
Owned by corporations or social institutions, non tradable .
Exchange stocks
All tradable stocks holding by individuals and institutions.

Limitied Investment Choices
NO MORTGAGE MARKET
NO FOREIGN EXCHANGE MARKET
PROHIBITED TO SHORT
Limited Free Float on Shares

Variety of functions of SSE
Providing marketplace and facilities for the securities trading
Formulating business rules
Accepting and arranging listings
Organizing and monitoring securities trading
Regulating members and listed companies
Managing and disseminating market information

SSE Composite Index
Constituents for SSE Composite Index are all listed stocks (A shares and B shares) at Shanghai Stock Exchange.
The Base Day for SSE Composite Index is December 19, 1990. The Base period is the total market capitalization of all stocks of that day. The Base Value is 100. The index was launched on July 15, 1991.

Strong Growth of Investors and Listing Companies

SSE Market Value…

Recent Movement Analysis on Shanghai Stock Index

Topic To Be Discuss
Fundamental Reason : Link between Stock Index and GDP ?
Other Reason : Link between Stock Index and Government Policy?
Market Easy To Be manipulate
Decreasing Trend June 2001 – April 2005
Increasing Trend from May 2005 - Now

Link To GDP ? No…!

Fundamental Analysis
Link between GDP and Index Movement…? No..!
As we could see to the chart
From May.2001 to April.2005, China’s GDP grow on a average base of 9%, total growth of 84%.
And the GDP total growth from 11.59 billion to 22.25 billion (US Dollar).
But the Shanghai's Index fall down from 2245 to 988 ,total lost of 56%

Link To Government Policy? Yes…!! 29/4/1997 19/5/1999 5/4/1996 29/5/2001 6/6/2005

Link To Government Policy? Yes…! 6/6/2005 16/10/2007

Government Policy Analysis
Link between Government Policies and Index movement…? Yes…!
A few major policy changes inside this:
5/4/1996 : First time to low interest rate since 1990
29/4/1997: Forbidden of investment in stock market for listed companies
19/5/1999 : People's Daily : <A correct understanding of the current stock market>
29/5/2001: The start of reduction of “state-owned shares”
6/6/2005 : The start of “Share Reform”
16/10/2007 :The end of “17th Conference of CCP”

Market Easy To Be Manipulate Data: Dec.4, 2007

Market Easy To Be Manipulate
For example, Petro China :
Due to the calculation method of Shanghai Index, it’s 4953.2 billion RMB total market value contain 24.8% of the Index !
But only 91.7 billion RMB, which means 1.85% could be trade in the market, and the rest share is owned in the government !
The government could easily control the whole market.

SSE Index Movement 2000-2007

The Reason of Decreasing Trend June 2001- April 2005
Privatization of state owned entities (SOE): Initial Public Offering (IPO)
The “Macro-economical control”
Improvement on regulation

The Privatization of SOE: IPO
Government was pushing low efficiency SOE to IPO
Over value of IPO price.
The “Macro-Economical control”
As some state-economist says that 7% should be a “Persistent Growth Rate” , then the government try to cool down the growth

Improvement on Regulation
In 2001, Ms. Meilun Shi, a well experienced person in Hongkong capital market, becoming new Chief of China Securities and Exchange Comission. Since that time, she introduced many regulations to improve China’s capital market.

The Reason of Increasing Trend May 2005 - Now
IPO : Stop of IPO process
The stop of reduction of “state-owned shares”
Share status reform !

The Reason of Increasing Trend May 2005 - Now
Stop of IPO process to reform and privatize SOE
Finally The Government stop the way to use stock market to help the incurable companies.
The Government start to permit small private business to IPO
The stop of reduction of “state-owned shares”
In Oct 2001, facing a fall down of 50% in 3 months, it pause. In Jun 2002, it finally stops.
It stops the falling down trend, but it does not make the market go up again.

The reason of Increase from May.2005
Share Reform !
Change the status of “Non-tradable” share, such as State-owned shares and Corporation stocks
The general reform price : Free 3 shares for every 10 exchange share
The introduction of warrant
This is the major reason of the new round of stock market bullish since May 2005

Academic Analysis On Bubble And Its Pattern

Topic To Be Discuss
Academic Research on Bubble
Pattern of Stock Bubble
Pattern Analysis in China Stock Market

Several Definition About Bubble
Increase on Stock prices due to expectation of further increase (Schiller, 2005)
The level of price changes and fluctuation which can not be explained by asset pricing models which is usually used to measure the effect of fundamentals.
Any period when there is sharp decline on assets prices after rising period (Mishkin and White, 2003)

Characteristic of Stock Bubble
Main Characteristic of Stock Bubble:
Stock movement can not be explained by fundamental valuation model
Crowd psychology  Excessive Speculation
Sharp rise on volatility

NIKKEI Bubble Burst 1989-1991

NASDAQ Bubbles Burst 1999-2002

SSE Index Bubble…?

Similar Pattern…

The Highest P/E Ratio In 2007

Conclusion

Reason To Say “Bubble”
High P/E ratio comparison to another countries.
Movement on price could not explain by economic and companies performance.
Government Policy play important role on market movement and companies strategies
Market very volatile.
Very small stock float made market very easy to be manipulate.

When It Will Be Burst…?
Very Difficult to Answer…
There is no academic research could answer when the bubble will burst.
But, we are convinced that current pattern could not last forever.
All the market movement is Government Policies driven.
Need a smooth transition to avoid bubble burst

Bibliography
Mishkin, Frederic S and Eugene N. White. 2003. U.S Stock Market Crash and Their Aftermath. MIT Press: Massachucetts.
Schiller, Robert J. 2005. Irrational Exuberance: Second Edition. Currency Double Day: New York
Asian Development Bank Report : Asian Economic Monitor December 2007. www.adb.org
www.finance.yahoo.com
www.ft.com
www.stats.gov.cn
www.sse.com.cn

China Stock Market

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