Essay on History of Chinese 2015 Stock Market Crisis

Despite China being the worlds largest investor and also the greatest contributor to the global economic growth by huge margins, it suffered a major economic crisis in 2015 that shook its economic prowess. It all started when there was a three week plunge knocked down approximately 30% off Chinese share. This led to the Chinas securities regulators warning about the panic sentiment that has been a challenge to most of the investors, out of which a large number of the affected individuals are investors who have borrowed a lot of funds to be the players in the stock market. A lot of Chinese companies have cancelled their dealings in their shares in an attempt to arrest a frenzy of selling. The government has stepped into the situation trying to look into the best ways that can be used to solve the situation. The authorities have gone even to the extent of including a surprise interest rate cut. However, the measures that were placed to rectify the situation at that moment did not yield any positive outcome. He measures however helped to alarm the world on the situation that was taking place in China. Being that China is the world leading economy country, it is important to understand the driving forces that led to the economic crisis that was experienced in 2015. The aftermath of the situation did only influence the country on its own but affected the whole world as there are a lot of dependent countries on the Chinese economy. This made investors and the policy makers all over the world to find the turmoil into the stock market that will spill the Chinas real economy. This would help to restore the huge engine of the world economy.

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The stock market crisis started as a crisis that could have been easily resolved. It began with a fall in the stock markets that might at the outset at least, been taken to mean the healthy clearing of froth from the worlds frothiest stock market. However, the whole crisis that began in Asia and caused a bad drop in the American markets grew up to become one of the most economic crises that have ever been experienced in the world. The whole crisis began on June 12 2015. The crisis extended to the second month of February. Approximately 33% of A-shares on the Shanghai Stock Exchange were lost in one month. The crisis even intensed on July 27th and August 24th (Black Monday), the negative consequences of the crisis was experienced during the above dates. When the Shanghai Stock Market recorded the he loss, approximately 1400 companies which was an equivalent of more than half of its listed companies filed for a trading halt so that they can prevent their companies from experiencing more losses. This led to the values of the China stock market to continue deteriorating even when there were efforts by the government to rectify the situation. In three weeks into the crisis, the Shanghai index fell by 8.48% recording the highest fall from 2007.

Being that China is regarded as one of the worlds economic engine, the International Monetary Fund in their annual meeting at the October 2015 of finance ministers and central bankers from the Washington-based lenders 188 member-countries" that was held in Peru, the issue about the deteriorating state of the China Stock Market dominated the agenda raising the question whether the crisis will impact bring a financial crisis that will impact in most parts of the world.

The Chinas economic growth experienced challenges in 2008 global recession and the aftermaths. Being a global issue, the government of China reacted to the 2008 recession with some sensitive strategies that would ring about resources from both the private and the public sector with the intention of funding the unparalleled infrastructure build. This was aimed at drawing organizations from all over around the world and projects the economy of China so that China could restore its economic prowess that it was enjoying before the recession. This however resulted in deserted roads, vacant sky scrapers and a huge debt. As much as the financial crisis that was experienced in the stock market assisted the economy to some extent, the aftermath of the 2008 recession and unsuccessful incentive package remained. Between 2009 and 2011, the real Gross Domestic Product growth in China reduced to averagely 9.6% and the subsequent couple of years, the real GDP increased at a rate of 7.7%. There was an opportunity for a nationwide reinvestment into the economy through the stock market. This made the government to encourage citizens and investors from outside to trade in the country. This explains why the China Stock market is largely conquered by individual investors. Indicative of the sheer size of investor inflow into the markets, following many months of bull markets developing in China, over 30 million new accounts were opened by individual investors between January and May of 2015 as this is what was provided by the Chinas Securities Depository and Clearing Corp. Furthermore, a large number of investing population symbolically stands for market capitalization. The problem now comes from this large number of accounts that was registered. Most of the new investors that were registered were inexperienced and were easily manipulated by the purchase of frenzy with more than 60% having not even qualified or graduated for high school as was discovered from the study that was done by Chinas Southwestern University of Finance and Economics. Because of this, the pressure and the rumors that were going around concerning the traders overpowered the reason when it came to the decision making. This created a trend of impulsive buying and also overvaluation in the market. This was the genesis of the China Sock Market Crisis that was being experienced in 2015. The large number of the retailer investors was inexperienced and therefore the decisions that they made affected the whole industry and other companies that were involved.

This brought a lot of crash in the stock market. When measures were introduced to rectify the crash, the China Securities Regulatory Commission that handles the task of proposing and enforcing securities had removed some of the restrictions that are concerned with the financial regulations. Before the major policy reform in 2010, China implemented a testing stage for their stock exchange whereby 90 of the chosen were authorized to be sold short and traded on margin. The list was expounded over time. The number grew to 280 as those companies were given the same authorization in late 2011. After this, the CSRC applied a total policy shift which legalized both practices across the whole stock market. The regulation changes that were put across brought about a significant increase in borrowing with the aim of trading. This made short selling to become the most common investing strategy. Short selling also became the most common investing strategy among traders. The changes were quite positive considering that the average daily short turnover rose from 0.01% to 0.73% between the start of 2010 to 2012 while the average daily margin purchase turnover rose from 0.78% to 5.15%. Because of this, there was a great influx in the Chinese market. There were a lot of debt-funded trades and risky short selling plays. This was now a threat to the Chinese Stock Market. To worsen the situation, the CSRC acted as a regulatory bystander. They refused to do anything that would ruin the political and social stability of the time. In trying to act though maintaining the social and political stability, the de-listing public companies that did not give their best for the three consecutive quarters which is a common law in China, the CSRC would constantly let the companies that were not doing well and overvaluing shares that were basically worthless on the books.

In November 2014, the Chinas renminbi (RMB) was one of the biggest worlds top five payment currencies outdoing the Australian dollar as well as the Canadian dollar. On the 11th of August 2015, just two months after the crisis, the Peoples Bank of China devalued the RMB by 1.86% to CN6.2298 per US dollar. Lowering the value of the Chinese RMB meant that the Chinas export became more competitive in the foreign markets thereby offsetting the part of the surge in the countrys blue collar wages over the last decade. In addition, it also makes the foreign houses, companies and other foreign investors appeared to be more expensive. The central bank once again devalued the RMB to CN6.3975 per US dollar on 14th of August. Prior to this, there was prediction concerning the causes of the devaluation of the Yuan and the variations in the Chinese economy in 2015 which was inclusive of the growth in the service sector instead of the heavy industry. In the end of the year, a lot of economists argued that the fall in the value of the Yuan was brought about by political reasons. These claims were however dismissed by the spokesperson for the International Energy Agency claiming that the risk was overplayed. China launched a new clearing system on 8th October 2015. Its primary objective was to settle cross-border RMB transactions and intended to increase the global usage for the Chinese. This was to be achieved by cutting down the transaction costs and processing times and then eliminating one of the largest hurdles to internationalizing the Yuan. Due to the stock market crisis of 2015, the launch of the program had to be delayed and CIPS was watered down thus giving complimentary networks for settling trade related deals that were in the Chinese currency to a current patchwork of Chinese clearing banks that were all over the world. By the end of 2015, the RMB remained to be still the fifth most used global expenditures exchange and the number two most used currency for trade finance and furthermore, 27% of the Chinas goods invoiced in RMB which was more than 19% that was recorded in 2014. This made China to gain the status of the biggest exporter in the world.

The gap that was left by the crisis goes beyond the stock markets. The emerging market currencies ranging from the Malaysian ringgit to the South African rand were tumbling. There was also a sink in the commodities that were being traded. The gold trade was down as the investors that used gold as collateral for purchasing shares and other asses had to flog the gold so as to attain the margin calls. The weakening outlook of the Chinese economy that was brought by the crisis of the stock market and a slip in the Chinas currency acted as a single unit to the economy of China to put pressure on the emergent economies and particularly the economies that their growth models were dependent on the Chinese demand for industrial and other sectors. The emergent markets have also been pressured by the Fed that has been preparing the world economy to expect the first interest rate in approximately a decade. Strict monetary conditions in America have caused a reduction in the capital flows to big emerging economies to increasing the value of a dollar and to more challenging conditions for companies and governments that have dollar denominated loans to repay.

There were a lot of measures that were put across by the Chinese government to rectify the crisis. The regulators restrained short selling under the threat of arrest. Huge pension funds and mutual funds promised to purchase more funds. The government also placed a halt to initial public offerings. Cash were given to brokers to buy shares by the government. Being that the Chinese markets largely consist of individuals and not the institutional funds, the government-run media proceeded to convince the citizens to buy more stocks. Furthermore, the China Security Regulatory Commission placed a six month ban from selling of stocks. This brought a 6% increase in the stock markets. Also, there was suspension of averagely 1300 total organizations which is 45% of the stock...