This document summarizes the Chinese stock market crash of 2015. It provides background on how the crash occurred as millions of ordinary Chinese citizens invested borrowed money, inflating stock prices to unsustainable levels. When prices began falling, investors were forced to sell to pay back loans, exacerbating the crash. The document outlines various measures taken by the Chinese government to prop up the falling market, but these actions further drove prices down. It concludes that the crash has wiped out over 3 trillion dollars in wealth and spread turmoil to other Asian and global markets.

1. Abstract.....................................................................................2
Introduction - Background................................................................3
Problem Statement........................................................................4
Proposed Methodology ...................................................................6
Future direction & Long term focus....................................................7
Results & Conclusion .....................................................................8
References .................................................................................9
Chinese Stock Market Crash 2015 Page 1 of 10
contents
Analyzing Chinese Stock Market Crash of 2015
Agile & Accountable Methodology
A U T H O R : J a i m i n P a r i k h

2. Abstract
CHINA is certainly not the first country to try to prop up a falling stock market. The central
banks of America, Europe and Japan have all shown form in buying shares after crashes and
cutting interest rates to cheer up bloodied investors. But the circumstances and the manner of
Chinese Governament intervention of the past Few days make it an outlier.
The trigger in China’s case is perplexing. Yes, the stock market is down a third over the past
month, but that has simply taken it back to March levels it is still up 80% over the last year.
Growth, though slowing has stabilized recently. Other asset markets are performing well.
Property long in the doldrums, is turning up. Money-market rates are low and steady, suggesting
calm in the banking sector. The anticipated correction of over-valued stocks hardly seems cause
for much anguish.
The Chinese government enacted many measures to stem the tide of the crash.
• Regulators capped short selling.
• Pension funds pledged to buy more stocks.
• The government suspended initial public offerings, limiting the supply of shares to drive
up the prices of those already listed.
• Brokers created a fund to buy shares, backed by central-bank cash.
• All the while, state media played cheerleader.
Far from saving the market from drowning, the succession of life inform of above strategies only
pushed it further under water.
• The CSI 300, an index of China’s biggest-listed companies, fell almost 10% over seven
trading days after the rate cut.
• ChiNext, an index of high-growth companies that is often described as China's Nasdaq,
fell by 25%.
And now that the global financial system is more interconnected than ever, what goes on over in
China has a greater impact on the rest of the globe than ever before. Today, China has the largest
economy on the planet on a purchasing power basis, and the Chinese stock market is the second
largest in the world in terms of market capitalization.
Theories have flourished about why the government has waded in so heavily. The apparent
desperation is, some believe, a sign that officials see a looming economic collapse, and are trying
to staunch the wound before social upheaval ensues. That story is intriguing.
Chinese Stock Market Crash 2015 Page 2 of 10

3. Introduction - Background
China’s economy is slowing. More importantly, it is undertaking a rapid and strategic evolution
from a model based on high levels of credit and investment to one based more on consumer
spending and high-value services. As China watchers and global investors parse their data and
monitor the news, this might be an opportune time to address some prominent themes and adjust
a few misconceptions.
China’s growth has a profound impact on Asia and a significant effect on developed and
emerging markets around the world. The economic slowdown that is underway is entirely
appropriate as the world economy emerges from several years of crisis intervention, as the U.S.
recovery gathers steam and as Europe steadies itself in the wake of its sovereign debt issues.
The second largest stock market in the entire world is collapsing right in front of our eyes. Since
hitting a peak in June, the most important Chinese stock market index has plummeted by well
over 20 percent, and more than 3 trillion dollars of “paper wealth” has been wiped out. Of
course, the Shanghai Composite Index is still way above the level it was sitting at exactly one
year ago.
But what is so disturbing about this current crash is that it is so similar to what we witnessed just
prior to the great financial crisis of 2008 in the United States. From October 2006 to October
2007, the Shanghai Composite Index more than tripled in value. It was the greatest stock market
surge in Chinese history. But after hitting a peak, it began to fall dramatically. From October
2007 to October 2008, the Shanghai Composite Index absolutely crashed. In the end, more than
two-thirds of all wealth in the market was completely wiped out.
The amount of wealth that has been wiped out during this Chinese stock market crash is already
greater than the entire yearly GDP of Brazil.
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4. Problem Statement
Chinese stock markets are in complete collapse right now, with the main Shanghai Composite
index losing 30% of its value in just the last three weeks. The turmoil is now starting to spread to
other Asian markets and global commodities markets.
The reason behind the crash is this: millions of ordinary Chinese citizens sunk borrowed cash
into shares, which inflated prices to unsustainable levels. When prices began to dip, these
investors were forcing to sell shares to pay back the borrowed money and cover losses. That
vicious circle of selling is going on right now and it’s creating “panic” and pushing down prices.
A huge amount of money has been put into Chinese stock markets over the past year or so by
regular Chinese people, something the government has encouraged. There are now 90 million
“retail” investors — ordinary people who own stocks — in China, making up 80% of all
shareholders. That means there are more stock market investors in China than there are
Communist Party members, Bloomberg noted recently.
The bubble grew and grew: price-to-earnings (P/E) ratios for Chinese stocks averaged an
astounding 70:1, against a worldwide average of 18.5:1. The value of the A-shares inside China
grew to be nearly double the equivalent shares of the same companies on the Hong Kong
exchange. Ordinary Chinese people had become so intoxicated by bull-market euphoria that
stories began to proliferate about people leaving their jobs, and even their families, to become
day traders, often using funds borrowed from high-interest rate “shadow banks” or loans taken
out against their homes. (By last weekend, margin borrowing on both exchanges had surpassed
$320bn, representing almost 10% of the total market capitalisation of all stocks being traded.)
The rush of money into Chinese stocks coincided with a surge in the benchmark Shanghai
Composite, which had risen over 150% since the start of the year when it peaked in June.
The main Shanghai Composite index has exploded since the start of the year. But the companies
whose share prices were rising weren’t actually getting any better — the prices were going up
simply because there was so much demand and people were bidding prices up.
The cracks began to show when shares in a few notable Chinese companies, such as “Hanergy”,
went into free fall earlier this year. That unleashed the biggest problem of all “Margin calls”.
Most of the retail investors who put money into shares weren’t using their own cash, but using
their money as collateral to borrow way more money than they had to invest. This is known as
“leveraged investing.”
Chinese brokerages went all-in on this — Credit Suisse estimated that the figure for borrowed
funds invested in the stock exchange reached between 4.4 trillion yuan (£460.1 billion,
$US708.3 billion INR 48 Trillion) to 5.9 trillion yuan (£617 billion, $US949.8 billion, INR 65
Trillion) before the pop. At the top end that’s 9% of the exchange’s entire worth.
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5. But when prices went down, the brokerages that had advanced all this money asked investors to
put up more cash to cover the fall in value. Sophisticated investors would have the resources to
do this and the understanding to calculate whether it was worth the risk. But most retail
shareholders just sold the stock they’d already bought, using this cash to meet the fees.
That’s now creating the opposite problem to the one that inflated the market — a wealth of
sellers, pushing down prices.
The presence of so many first-time punters has contributed to market volatility. Retail investors
produce more than 80% of transactions in Chinese stocks, driving daily price swings. Moreover
young investors have been among the most aggressive in borrowing cash to buy stocks. They
have limited understanding of risks, which leads to excessive use of leverage.
Technically, it should be difficult for the young to use borrowed cash because of the high
minimum wealth threshold set by the government for margin financing. But online peer-to-peer
lending and smartphone apps have allowed investors to obtain loans with much lower amounts
of collateral. Belatedly, regulators have cracked down on these.
• Along with cutting the interest rate.
• Allowing the use of property as collateral for margin loans.
• Encouraging brokerage firms to buy stocks with cash from the People's Bank of China"
caused Chinese stocks to begin surging in mid-July.
After three stable weeks the Shanghai index fell again on 27 July by 8.5 percent, marking the
largest fall since 2007.
• The vast majority of companies listed in Shanghai, including many large state-owned
firms, fell by the maximum daily limit of 10%. Losses in Shanghai, and on the smaller
Shenzhen Composite index, accelerated into the close. Shenzhen, which is heavy on tech
stocks, closed down 7%.
• Industrial profit data released Monday indicate that factories in the world's second-largest
economy are losing momentum. Profits dropped 0.3% in June, compared to the same
period last year, Also an early measure of China's manufacturing activity for July came in
below analyst expectations. The reading was the lowest in 15 months.
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6. Repeated efforts by the Chinese government to stem the losses have failed.
Proposed Methodology
The Chinese government enacted many measures to put a break on Market Slump.
1. Regulators limited short selling under threat of arrest, China Financial Futures Exchange
(CFFEX) suspends 19 accounts from short-selling for one month.
2. Large mutual funds and pension funds pledged to buy more stocks, China's top
brokerages pledged to collectively buy at least 120 billion yuan ($19.3 billion) of shares
to help steady the market, and would not sell holdings as long as the Shanghai Composite
Index remained below 4,500.
3. The government stopped initial public offerings, More than 28 companies suspended
their IPOs, there will be no new IPOs in the near term," the China Securities Regulatory
Commission (CSRC) said in a statement.
4. The government also provided cash to brokers to buy shares, backed by central-bank
cash. Because the Chinese markets are made up mostly of individuals and not
institutional funds.
5. The CSRC announces relaxation of rules on margin trading before market open, lowering
threshold for individual investors to trade on margins and expanding brokerages' funding
channels, 80 percent of investors in China are individuals, state-run media continued to
persuade its citizens to purchase more stocks.
6. China Securities Regulatory Commission (CSRC) imposed a six-month ban on
stockholders owning more than 5 percent of a company's stock from selling those stocks,
resulting in a 6 percent rise in stock markets.
7. Around 1,300 total firms, representing 45 percent of the stock market, suspended the
trading of stocks starting on 8 July.
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7. Future direction & Long term focus
China can ill afford this market failure. Its stock market has soared and crashed before, but
earlier booms were tied to a rising economy. This bubble took place in an economy that is losing
steam. China’s miracle years have played out, and the government faces a difficult transition to
the higher-value, more efficient and market-oriented economy needed to sustain the next phase
of development.
The country’s corporate and local government debt totals an extraordinary 280% of GDP, and
has been growing twice as fast as the economy for more than a decade. The property market is
depressed and overstocked, and confidence is fragile. China’s future depends on the party’s
capacity to make its state capitalist model leaner, greener and more efficient.
The road ahead is fraught with risk. Some challenges are now endemic: a demographic profile,
the result of the one-child policy, that gives China the world’s most rapidly ageing population;
poor and expensive education; unpaid bills for environmental damage and its health effects; and
the prospect of escalating climate impacts that will exacerbate an already acute water crisis and
failing crop yields.
China aims to export its over-capacity through grand infrastructure projects around the world,
but many of the proposed host countries are vulnerable to political and economic hazards. It is
betting on rising domestic consumption, but the consumers are getting old, and their children are
a squeezed generation with their own expenses to meet. It is betting on innovation, in a system
that does not support small risk-takers or the free exchange of ideas. And it is betting on the
internationalization of its currency ”Yuan”, and the opening of China’s financial systems to
global markets – but international investors and regulators may well be more cautious than a
month ago.
The immediate repercussions of the crash, in a week when Europe is preoccupied with Greece,
have largely played out inside China. But in a world that has come to rely on China to keep the
global economy ticking over, China’s risk is now everybody’s risk.
The current regime has turned its back on political reform, tightening internal security and
promoting a new insistence on socialist dogma. Ironically, China’s success will hinge on how
well it can play the next round of the capitalist game. After this week, the odds may have to be
adjusted.
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8. Results & Conclusion
China may be somewhat out of step with the economic, social and political standards that have
come to prevail in most of the world today. And there is a certain disordered quality to a vast
nation composed of numerous ethnic groups, varying rates of economic development and a
substantial gap between an opaque and rigid central government and local authorities that each
pull in their own direction.
But to presume that China is losing control or that the present downshift in GDP growth is
unplanned would be wide of the mark. However one may feel about China’s reforms, they
cannot be described as haphazard.
China’s experimentation with market forces in financial services, with new approaches to law
and governance, are of a piece with other reforms going on in the social realm—notably in
education, where China is orienting its focus away from rote learning (useful in mass production)
and toward originality of thought (critical for service industries, technology and finance).
As China embarks on its next phase of economic development, we should perhaps be patient. We
should recall how far it has come, note the deliberate but transformational nature of its policy
shifts and remember that China always takes the long view— looking backward to history and
forward well into the future, when it will resemble slower-growing economic blocs such as
North America and Europe more than the developing markets from which it emerged.
Contemporary China seems nothing less than a civilization in transformation.
Stockmarket is that it still plays a surprisingly small role in China. The free-float value of
Chinese markets—the amount available for trading—is just about a third of GDP, compared with
more than 100% in developed economies. Less than 15% of household financial assets are
invested in the stockmarket: which is why soaring shares did little to boost consumption and
crashing prices will do little to hurt it. Many stocks were bought on debt, and the unwinding of
these loans helps explain why the government has been unable to stop the rout. But this
financing is not a systemic risk, it is just about 1.5% of total assets in the banking system.
Chinese Stock Market Crash 2015 Page 8 of 10

9. Abbreviations and Acronyms
P/E Price To Earnings Ratio
GDP Gross Domestic Product
CSRC China Securities Regulatory Commission
CFFEX China Financial Futures Exchange
References
<Bibliography of resources and references>
The Economist Magazine The Guardian (UK)
Reuters NDTV Profit
David Stock Mans Corner The Wall Street Journel
The Intellihub Business Standard
Chinese Stock Market Crash 2015 Page 9 of 10

10. About the author
About the author: Jaimin Parikh is an MBA in Finance & Did his
Bachelors in Finance & Econometrics From Somaiya College.
Also a Runner Up of IIM A – International Case Writing Masters in its
Annual Biz Fest “Confluence”.
Completed “Management Student Programme” From IIM Ahmedabad.
Has Worked with ING Vysya Bank Ltd.
Working in Standard Bank Enagagement as Business Analyst.
Loves Reading, Photography & Is a Travelling Enthusiast.
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