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An Analysis of Shanghai Stock Exchange Movement in 2000-2007: Is It A Bubble Pattern? Liu Pei Septian Hario Seto Simon Hua...
Agenda <ul><li>Overview: Recent China Economic Indicators </li></ul><ul><li>Structure And Development Of China Stock Marke...
Structure and Development of Shanghai Stock Exchange
Topic To Be Discussed <ul><li>Overview of China Recent Economic Indicators </li></ul><ul><li>Structure and Development of ...
GDP Growth and CAB to GDP Ratio
Increase Inflationary Pressure…
Tightening Monetary Policies
Negative Interest Rate… <ul><li>November year on year inflation rate announced by National Bureau of Statistic of China in...
Shanghai Stock Exchange (SSE) <ul><li>Founded on Nov. 26th,1990 </li></ul><ul><li>Non-profit-making membership institution...
Type of shares <ul><li>A share dominated in Yuan. Listed in  Shanghai  and Shenzhen Stock Exchange. Initialy listed in Nov...
More Details About A Shares <ul><li>State-owned shares.  </li></ul><ul><li>Takes most weight, non tradable. </li></ul><ul>...
Limitied Investment Choices <ul><li>NO MORTGAGE MARKET </li></ul><ul><li>NO FOREIGN EXCHANGE MARKET </li></ul><ul><li>PROH...
Variety of functions of SSE <ul><li>Providing marketplace and facilities for the securities trading </li></ul><ul><li>Form...
SSE Composite Index <ul><li>Constituents for SSE Composite Index are all listed stocks (A shares and B shares) at Shanghai...
Strong Growth of Investors and Listing Companies
SSE Market Value…
Recent Movement Analysis on Shanghai Stock Index
Topic To Be Discuss <ul><li>Fundamental Reason : Link between Stock Index and GDP ? </li></ul><ul><li>Other Reason : Link ...
Link To GDP ? No…!
Fundamental Analysis <ul><li>Link between GDP and Index Movement…? No..! </li></ul><ul><ul><li>As we could see to the char...
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 <ul><li>Link between Government Policies and Index movement…? Yes…! </li></ul><ul><li>A few maj...
Market Easy To Be Manipulate Data: Dec.4, 2007
Market Easy To Be Manipulate <ul><li>For example,  Petro China : </li></ul><ul><ul><li>Due to the calculation method of Sh...
SSE Index Movement 2000-2007
The Reason of Decreasing Trend  June 2001- April 2005 <ul><li>Privatization of state owned entities (SOE): Initial Public ...
The Reason of Decreasing Trend  June 2001- April 2005 <ul><li>The Privatization of SOE: IPO  </li></ul><ul><ul><li>Governm...
The Reason of Decreasing Trend  June 2001- April 2005 <ul><li>Improvement on Regulation  </li></ul><ul><ul><li>In 2001, Ms...
The Reason of Increasing Trend  May 2005 - Now <ul><li>IPO : Stop of IPO process </li></ul><ul><li>The stop of reduction o...
The Reason of Increasing Trend  May 2005 - Now <ul><li>Stop of IPO process to reform and privatize SOE </li></ul><ul><ul><...
The reason of Increase from May.2005 <ul><li>Share Reform !  </li></ul><ul><ul><li>Change the status of “Non-tradable” sha...
Academic Analysis On Bubble And Its Pattern
Topic To Be Discuss <ul><li>Academic Research on Bubble </li></ul><ul><li>Pattern of Stock Bubble </li></ul><ul><li>Patter...
Several Definition About Bubble <ul><li>Increase on Stock prices due to expectation of further increase (Schiller, 2005) <...
Characteristic of Stock Bubble <ul><li>Main Characteristic of Stock Bubble: </li></ul><ul><li>Stock movement can not be ex...
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”  <ul><li>High P/E ratio comparison to another countries.  </li></ul><ul><li>Movement on price could...
When It Will Be Burst…? <ul><li>Very Difficult to Answer… </li></ul><ul><li>There is no academic research could answer whe...
Bibliography <ul><li>Mishkin, Frederic S and Eugene N. White. 2003. U.S Stock Market Crash and Their Aftermath. MIT Press:...
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China Stock Market

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China Stock Market

  1. 1. An Analysis of Shanghai Stock Exchange Movement in 2000-2007: Is It A Bubble Pattern? Liu Pei Septian Hario Seto Simon Huang He
  2. 2. Agenda <ul><li>Overview: Recent China Economic Indicators </li></ul><ul><li>Structure And Development Of China Stock Market </li></ul><ul><li>Recent Movement Analysis On Shanghai Stock Exchange </li></ul><ul><li>Stock Bubble And Its Pattern </li></ul>
  3. 3. Structure and Development of Shanghai Stock Exchange
  4. 4. Topic To Be Discussed <ul><li>Overview of China Recent Economic Indicators </li></ul><ul><li>Structure and Development of Shanghai Stock Exchange </li></ul>
  5. 5. GDP Growth and CAB to GDP Ratio
  6. 6. Increase Inflationary Pressure…
  7. 7. Tightening Monetary Policies
  8. 8. Negative Interest Rate… <ul><li>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. </li></ul>
  9. 9. Shanghai Stock Exchange (SSE) <ul><li>Founded on Nov. 26th,1990 </li></ul><ul><li>Non-profit-making membership institution </li></ul><ul><li>Most preeminent stock market in Mainland China </li></ul>
  10. 10. Type of shares <ul><li>A share dominated in Yuan. Listed in Shanghai and Shenzhen Stock Exchange. Initialy listed in Nov 1984. </li></ul><ul><li>B share dominated in US Dollars. Listed in Shanghai and Shenzhen Stock Exchange. Initialy listed in 1992 Feb. </li></ul><ul><li>H share dominated in HKD, listed in Hongkong Stock Exchange, initialy listed in 1993. </li></ul>
  11. 11. More Details About A Shares <ul><li>State-owned shares. </li></ul><ul><li>Takes most weight, non tradable. </li></ul><ul><li>Corporation stocks </li></ul><ul><li>Owned by corporations or social institutions, non tradable . </li></ul><ul><li>Exchange stocks </li></ul><ul><li>All tradable stocks holding by individuals and institutions. </li></ul>
  12. 12. Limitied Investment Choices <ul><li>NO MORTGAGE MARKET </li></ul><ul><li>NO FOREIGN EXCHANGE MARKET </li></ul><ul><li>PROHIBITED TO SHORT </li></ul><ul><li>Limited Free Float on Shares </li></ul>
  13. 13. Variety of functions of SSE <ul><li>Providing marketplace and facilities for the securities trading </li></ul><ul><li>Formulating business rules </li></ul><ul><li>Accepting and arranging listings </li></ul><ul><li>Organizing and monitoring securities trading </li></ul><ul><li>Regulating members and listed companies </li></ul><ul><li>Managing and disseminating market information </li></ul>
  14. 14. SSE Composite Index <ul><li>Constituents for SSE Composite Index are all listed stocks (A shares and B shares) at Shanghai Stock Exchange. </li></ul><ul><li>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. </li></ul>
  15. 15. Strong Growth of Investors and Listing Companies
  16. 16. SSE Market Value…
  17. 17. Recent Movement Analysis on Shanghai Stock Index
  18. 18. Topic To Be Discuss <ul><li>Fundamental Reason : Link between Stock Index and GDP ? </li></ul><ul><li>Other Reason : Link between Stock Index and Government Policy? </li></ul><ul><li>Market Easy To Be manipulate </li></ul><ul><li>Decreasing Trend June 2001 – April 2005 </li></ul><ul><li>Increasing Trend from May 2005 - Now </li></ul>
  19. 19. Link To GDP ? No…!
  20. 20. Fundamental Analysis <ul><li>Link between GDP and Index Movement…? No..! </li></ul><ul><ul><li>As we could see to the chart </li></ul></ul><ul><ul><li>From May.2001 to April.2005, China’s GDP grow on a average base of 9%, total growth of 84%. </li></ul></ul><ul><ul><li>And the GDP total growth from 11.59 billion to 22.25 billion (US Dollar). </li></ul></ul><ul><ul><li>But the Shanghai's Index fall down from 2245 to 988 ,total lost of 56% </li></ul></ul>
  21. 21. Link To Government Policy? Yes…!! 29/4/1997 19/5/1999 5/4/1996 29/5/2001 6/6/2005
  22. 22. Link To Government Policy? Yes…! 6/6/2005 16/10/2007
  23. 23. Government Policy Analysis <ul><li>Link between Government Policies and Index movement…? Yes…! </li></ul><ul><li>A few major policy changes inside this: </li></ul><ul><ul><li>5/4/1996 : First time to low interest rate since 1990 </li></ul></ul><ul><ul><li>29/4/1997: Forbidden of investment in stock market for listed companies </li></ul></ul><ul><ul><li>19/5/1999 : People's Daily : <A correct understanding of the current stock market> </li></ul></ul><ul><ul><li>29/5/2001: The start of reduction of “state-owned shares” </li></ul></ul><ul><ul><li>6/6/2005 : The start of “Share Reform” </li></ul></ul><ul><ul><li>16/10/2007 :The end of “17th Conference of CCP” </li></ul></ul>
  24. 24. Market Easy To Be Manipulate Data: Dec.4, 2007
  25. 25. Market Easy To Be Manipulate <ul><li>For example, Petro China : </li></ul><ul><ul><li>Due to the calculation method of Shanghai Index, it’s 4953.2 billion RMB total market value contain 24.8% of the Index ! </li></ul></ul><ul><ul><li>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 ! </li></ul></ul><ul><ul><li>The government could easily control the whole market. </li></ul></ul>
  26. 26. SSE Index Movement 2000-2007
  27. 27. The Reason of Decreasing Trend June 2001- April 2005 <ul><li>Privatization of state owned entities (SOE): Initial Public Offering (IPO) </li></ul><ul><li>The “Macro-economical control” </li></ul><ul><li>Improvement on regulation </li></ul>
  28. 28. The Reason of Decreasing Trend June 2001- April 2005 <ul><li>The Privatization of SOE: IPO </li></ul><ul><ul><li>Government was pushing low efficiency SOE to IPO </li></ul></ul><ul><ul><li>Over value of IPO price. </li></ul></ul><ul><li>The “Macro-Economical control” </li></ul><ul><ul><li>As some state-economist says that 7% should be a “Persistent Growth Rate” , then the government try to cool down the growth </li></ul></ul>
  29. 29. The Reason of Decreasing Trend June 2001- April 2005 <ul><li>Improvement on Regulation </li></ul><ul><ul><li>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. </li></ul></ul>
  30. 30. The Reason of Increasing Trend May 2005 - Now <ul><li>IPO : Stop of IPO process </li></ul><ul><li>The stop of reduction of “state-owned shares” </li></ul><ul><li>Share status reform ! </li></ul>
  31. 31. The Reason of Increasing Trend May 2005 - Now <ul><li>Stop of IPO process to reform and privatize SOE </li></ul><ul><ul><li>Finally The Government stop the way to use stock market to help the incurable companies. </li></ul></ul><ul><ul><li>The Government start to permit small private business to IPO </li></ul></ul><ul><li>The stop of reduction of “state-owned shares” </li></ul><ul><ul><li>In Oct 2001, facing a fall down of 50% in 3 months, it pause. In Jun 2002, it finally stops. </li></ul></ul><ul><ul><li>It stops the falling down trend, but it does not make the market go up again. </li></ul></ul>
  32. 32. The reason of Increase from May.2005 <ul><li>Share Reform ! </li></ul><ul><ul><li>Change the status of “Non-tradable” share, such as State-owned shares and Corporation stocks </li></ul></ul><ul><ul><li>The general reform price : Free 3 shares for every 10 exchange share </li></ul></ul><ul><ul><li>The introduction of warrant </li></ul></ul><ul><ul><li>This is the major reason of the new round of stock market bullish since May 2005 </li></ul></ul>
  33. 33. Academic Analysis On Bubble And Its Pattern
  34. 34. Topic To Be Discuss <ul><li>Academic Research on Bubble </li></ul><ul><li>Pattern of Stock Bubble </li></ul><ul><li>Pattern Analysis in China Stock Market </li></ul>
  35. 35. Several Definition About Bubble <ul><li>Increase on Stock prices due to expectation of further increase (Schiller, 2005) </li></ul><ul><li>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. </li></ul><ul><li>Any period when there is sharp decline on assets prices after rising period (Mishkin and White, 2003) </li></ul>
  36. 36. Characteristic of Stock Bubble <ul><li>Main Characteristic of Stock Bubble: </li></ul><ul><li>Stock movement can not be explained by fundamental valuation model </li></ul><ul><li>Crowd psychology  Excessive Speculation </li></ul><ul><li>Sharp rise on volatility </li></ul>
  37. 37. NIKKEI Bubble Burst 1989-1991
  38. 38. NASDAQ Bubbles Burst 1999-2002
  39. 39. SSE Index Bubble…?
  40. 40. Similar Pattern…
  41. 41. The Highest P/E Ratio In 2007
  42. 42. Conclusion
  43. 43. Reason To Say “Bubble” <ul><li>High P/E ratio comparison to another countries. </li></ul><ul><li>Movement on price could not explain by economic and companies performance. </li></ul><ul><li>Government Policy play important role on market movement and companies strategies </li></ul><ul><li>Market very volatile. </li></ul><ul><li>Very small stock float made market very easy to be manipulate. </li></ul>
  44. 44. When It Will Be Burst…? <ul><li>Very Difficult to Answer… </li></ul><ul><li>There is no academic research could answer when the bubble will burst. </li></ul><ul><li>But, we are convinced that current pattern could not last forever. </li></ul><ul><li>All the market movement is Government Policies driven. </li></ul><ul><li>Need a smooth transition to avoid bubble burst </li></ul>
  45. 45. Bibliography <ul><li>Mishkin, Frederic S and Eugene N. White. 2003. U.S Stock Market Crash and Their Aftermath. MIT Press: Massachucetts. </li></ul><ul><li>Schiller, Robert J. 2005. Irrational Exuberance: Second Edition. Currency Double Day: New York </li></ul><ul><li>Asian Development Bank Report : Asian Economic Monitor December 2007. www.adb.org </li></ul><ul><li>www.finance.yahoo.com </li></ul><ul><li>www.ft.com </li></ul><ul><li>www.stats.gov.cn </li></ul><ul><li>www.sse.com.cn </li></ul>

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