China Stock Market

Crash
Group Members:
1. AayushAjmani (1)
2. Keshav Sharma (27)
3. Jasmine Kaur (25)
4. Sagar Jain (51)
5. Samarth Dargan (52)

Stock Exchanges of China

Hong Kong Stock Exchange

Chinese Yuan / Dollar

10
9

Yuan pegged to $;
China begins
running current
account deficit.

Chinese Yuan / Dollar

8
7
6
5
4
3
2
1
0

Plans for Floating

scrapped after
Asian financial
crises.

Stabilizing during
global financial
crises.

erve requirement ratio (RRR)

FEB15 : The Peoples Bank of

China just cut the reserve
requirement ratio (RRR) for banks

China Money Supply

1

Government pumped the stock market

Government pumped the stock market

Hey, why not
address our huge
problems by
replacing debt
with equity?
Economist ,
American Enterprise
Institute

Government launched asweeping stock

market bailout, vowing to prop up the
Shanghai Composite Index until it hit 4,500. The
problem is, every time it has neared that target
level, investors start selling in anticipation that
the government will pull back its support.

A bull market would help

indebted companies raise
new capital and pay off
overdue loans. But
eventually the market
tanked.

Hot money fled the country

CHINAs
Reaction
to
Stock Market
Crash

Impact of Crash on Chinese

Economy
Only 13% of the Chinese
population participate in the
stock market, the impact is
considered to be limited.
Most of these accounts are
funded to people
taking on debtto buy
stocks.
3 trillion $ lost
10* yearly military
expenditure
10* GDP of Greece

The countrys exports crashed by 8.3% yoy

Beijing's
Reaction
1 Provide more cash to China security Finance corporation
Chinese Central Bank also lend 260 billion renminbi to major brokerage firms via the
China Securities Corporation, thereby avoiding a scenario in which the firms ran out of
liquidity.

Ban on major stockholders to sell Shares

ChinaSecuritiesRegulatoryCommission(CSRC)imposedasix-monthbanonstockholdersowningmorethan5percentofa
company'sstockfromsellingthosestocks,resultingina6percentriseinstockmarkets

3
Suspension of initial public offerings and a further relaxation of the rules governing
insurance companies stock purchases.

Why focus on the currencys value?

Peoples Bank of China (PBOC) announced its
decision to liberalize the RMB reference rate.
Chinas exchange rate is pegged to a basket of currencies
but can fluctuate within a +/- 2 percent band on either side

The move triggered

an
immediate,
significant
depreciation of the
Chinese currency by
1.96%
suggesting
Beijing's
intention
was to depress the
currency to boost
exports and support
the
domestic
economy.

China's central
bank had
used the CSFC a
s a conduit
to help Chinese
people buy stocks
with borrowed
funds, helping to
prop up stock
market prices.
The authorities
probably hoped
that after a
month of doing
this, the stock
market had
stabilized enough
to make further

Theories of
opposites
Export-led growth

Consumption-led growth

Middle-income trap
Investment is extraordinarily high
relative to the domestic consumption
part of its GDP.
The lowering of the exchange rate of the Yuan
are steps towards making it convertible and
one among the basket of currencies to which
other currencies are pegged and changing
over to a consumption-led growth rather than
an export-led growth.

Chinese stock market collapse

indicates a structural crisis of
the Chinese economy.

The collapse is similar to the US housing bubble, Since

the real estate that has been built is far in excess of what
can be realistically bought, this will lead to a collapse of
the real estate market leaving the financial system with
huge bad debts.

In this view, the lowering of the exchange rate of the

Yuan is an attempt to reflate the Chinese economy, make
their exports more competitive and escape from this
impending crisis.

Emerging Markets and World

Regression analysis on various stock indices w.r.t.
Chinese stock index

*Stock index data used for 2014-2015

**Source: www.quandl.com

USA

Nasdaq
8.04 % of Chinas Imports
from USA

6000
5000
4000

R = 0.81

9.3 % of USAs exports to

China

3000
2000
1000
0
1500

2000

2500

3000

3500

4000

4500

5000

5500

Dow Jones

19000

In all, Chinese companies have

invested $46 billion in the
United States since 2000, with
most coming in the last five years,
according to a study prepared by the
Rhodium Group, a New York
research firm

18000

R = 0.63

17000
16000
15000
14000
1500

2000

2500

3000

3500

4000

4500

5000

5500

Brazil
Bovespa Brazil

Russia
RTSI Russia

70000

1600

60000

1400

50000

1200

R = 0

1000

40000

R = 0.45

800
30000

600

20000

400

10000

200

0
1500

2000

2500

3000

3500

4000

4500

5000

2.93 % of Chinas Imports from

Brazil
17 % of Brazils exports to China

5500

0
1500

2000

2500

3000

3500

4000

4500

5000

2.7 % of Chinas Imports

from Russia
8.1 % of Russias exports to
China

5500

Singapore

South Africa
South Africa

Singapore

1400

1200

1200

1000

R = 0.01

1000

R = 0.15

800

800
600

600

400

400

200

200
0
1500

2000

2500

3000

3500

4000

4500

5000

5500

0
1500

2000

2500

3000

3500

4000

4500

5000

0.69 % of Chinas Imports from

South Africa

2.18 % of Chinas Imports from

Singapore

8.3 % of South Africas exports

to China

14 % of Singapores exports to
China

5500

India
BSE

1.14 % of Chinas
Imports from India

35000
30000

5.8 % of Indias
exports to China

R = 0.38

25000
20000
15000

Although, a good
opportunity for India
to shine, as it is the
next fastest growing
economy after China

10000
5000
0
1500

2000

2500

3000

3500

4000

4500

5000

5500

Conclusion for emerging markets and world

Hit on the reputation of emerging markets "I'm telling clients to avoid

in the eyes of potential investors
emerging markets completely, to

hold cash or cash equivalents

wherever possible," Smith, who left
Deutsche Bank last year to start an
independent research firm, Ecstrat,
said in an interview. "I can see
reasons why we might stabilize in
China is a drastically important
the short-term, but would I
company to the world economy. The
personally go back into emerging
country imports more than $1.4
markets Not
at stock
the present?
index crash, but slowing
trillion of goods yearly from
Absolutely
not.
economy
is a concern for emerging
across the world. Chinese
markets and the world
consumers have been helping to
boost the world economy with their

IMAPCT ON INDIAN GROWTH

STORY
SHANGHAI
COMPOSITE INDEX

A slowdown in the Chinese

economy isnt a terrible
event when you consider
that Modi is trying to
attract manufacturers with
his Make in India pitch

-Milan Vaishnav,
Carnegie Endowment for
International Peace

Short Term
Impact

Hard Hit
Sectors

Nearly30percentofactivetradersinIndia'sstockmarket
areForiegnPortfolioInvestors:continuetosellsharesin
immediatefuturefrompanicintheglobalmarkets
CrudOil
CairnIndiasharesclosed6.5percentlower
atRs.168
AutomobileSector
TataMotorssharesdeclined6.2per
centtoRs.404.95

IMAPCT ON INDIAN ECONOMY

Cheaper Infrastructure
CopperandAluminumtradingisat
analltimelowasChinawasthe
worldslargestconsumer
Copperpriceshittheirlowestlevelin
sixyears
Cheaper Input imports from China
Eg.MobilePhonesCheaper
Tyrecompaniestookahitofupto
12.5percent

Fuel May go Down

Savingof$70billion(Rs.4.60lakh
crore)hasreducedthecurrentaccount
deficit(CAD)to1.3percentofGDP
from2014

Cheapglobalcrudeandcommodity
pricesmeanLOWERimported
componentofinflation.Impactisvisible
intheWHOLESALEpriceindex,
showingnegativegrowthfornine
consecutivemonths

IMPACT
ANALYS
IS

Flooding of Indian markets with

cheap Chinese goods
Negative affect on
manufacturing and exports

Oil prices already low because

of a global slowdown and the
possible Iran-US nuclear deal
Low oil prices can help the
Indian government control its
deficit and check inflation

IMAPCT ON CURRENCY AND

COMMODITIES
Current Trend

Prices of gold have slipped to a four month low in

expectation that the present meltdown will spill over to the
gold market
Fall in global prices of gold was witnessed

CHINA

Lack of trust in
Chinese economic
management

INDIA

contagioneffect;
capitalflight

Emergi
ng
Markets

Long Term
Trend
China
imported 36% more gold both on a year-on-year

and month-on-month basis, suggesting investors are

parking their money in safe havens and hence uprward
price movement is evident

Way Ahead

China Stock Hidden Problems

China Economy
and
Stock Market

China Stock Market Way Forward

Government Stock Purchase

Reduction of Interest Rate
Availability of capital
Restriction in Stock Market Trading
Devalue Yuan

Government Buy Stocks

Optimistic View

Pessimistic View

Increase in demand of stocks

Increase in government spending

Stock prices increases

Increase Taxes to stabilize

spending

Investors confidence increase

Decrease in purchasing power

Market revive back

Fall in standard of living

Investors start to sell their shares
Stock market fall

Reduction of Interest Rate

Optimistic View

Pessimistic View

Borrowing becomes cheaper

Return on investment decreases

Stock market returns relatively

improves

Lenders looks for other avenues

Individual borrow funds & invest

in stocks

Lending decreases

Increase in demand of stocks

Reduction in margin trading

Investors confidence increase

Investors start to sell their shares

Market revive back

Stock market fall

Increase in Availability of Capital

Optimistic View

Pessimistic View

Individual borrow funds & invest

in stocks

The practice of borrowing money

Increase in demand of stocks

Stock prices increases
Investors confidence increase
Market revive back

Restriction in Stock Market Trading

Big shareholders can't sell for 6 months, Limited Stock Trading
Optimistic View

Pessimistic View

Increase in stability & limited

trading option

Asymmetry of information

Demand for trading stocks

increases

Reduction in rate of stock demand

Stock prices increases

Market grow at slow pace

Investors confidence increase

Big shareholders increase the

selling

Market revive back

Stock market fall

Devalue Yuan
Optimistic View

Pessimistic View

Exports become cheaper

Exposure for foreign investor

increases

China export increase & Economy

Grow

Foreign trading decreases

Purchasing power increases

Asymmetry of information

Investment in stock increase

Foreigners looks for other avenues

Stock prices increases

Growth reduces

Market revive back

Devalue Yuan Impact

Regression Statistics
0.53466
Multiple R
8
R Square
0.28587
Adjusted R Square
0.279919
Standard Error
441.2905
Observations
122
ANOVA

Analysis of Chines Stock Index and

Dollar-Yuan Exchange Rate (Dollar to
Yuan)

Significan
ce F

X= Exchange Rate
F
Y= Closing Stock Index
48.0366
Regression
1
93545379354537
9
2.25E-10
2336848 194737.
Residual
120
0
3
Coefficie Standard
Lower
Upper
Lower
Upper
3272301

nts
Error
t Stat
P-value
95%
95%
95.0%
95.0%
Total
121
6

30791.0 3852.04 7.99343

38417.8
38417.8
Intercept
9
8
3
9.15E-13 23164.3
7
23164.3
7
X Variable
617.954
*Stock index data used for 16 Mar 2015 7 Sep 2015
1
-4282.95
7
-6.93085 2.25E-10 -5506.46 -3059.44 -5506.46 -3059.44
**Source:
www.quandl.com

df

SS

MS

** Souce: www.exchangerates.org.uk

Expiration of China and WTO Contract Impact

Reduction in
government
subsidiary

Cost of production
increases

China and WTO

agreement ends on 1
January 2016

Stock market fall

Foreign
and
domestic
investment
flow out of
economy

Fall in economy

Decrease in
investment in
stock market

Reduction in
availability of
funds