7 Jaw-Dropping Facts from China’s Stock Market Bubble

China Stock Market BubbleBy now you have probably realized the existence of a huge bubble in the Chinese stock market and its recent burst. But there’s more to it than the boom-and-bust phenomenon. To further understand what has been going on in the emerging country, here are seven jaw-dropping facts from China’s stock market bubble.

1. Two-Thirds of New Chinese Investors Have Not Finished High School

According to a study from the Southwestern University of Finance and Economics, the majority of new investors in China’s stock markets do not have a high school diploma. Moreover, the new investors also had less asset ownership compared to existing investors.

This is a worrying sign as last year’s rally saw a huge boom in new trading accounts opened by retail investors. The levels of education and asset ownership show that last year’s rally was fuelled in large part by investors with little knowledge of the stock market. Another implication is that fundamentals did not matter that much as sentiment has been the main force that drives the Chinese stock market.

So, the Chinese stock market has gone up, and then gone wrong. Where is it headed next? Well, it really depends on how much confidence can be restored in the market, and based on what I see, it won’t be much at all.

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2. Chinese Stocks Have Soared 150% Over the Past Year

One chart says a thousand words.

Shanghai Stock Exchange Composite Chart

(Chart Courtesy of StockCharts.com)

The level of enthusiasm in the Chinese stock market was unseen before. The Shanghai Composite Index climbed from 2,063 points on July 3, 2014 to as high as 5,166 points on June 12, 2015. That was more than a 150% increase in less than 12 months!

And then, the crash happened…

Still, it was a remarkable run.

3. China’s Stock Market Has Completely Disconnected from the Real Economy

Fundamentals did not matter at all during last year’s phenomenal rally in the Chinese stock market. While the stock market soared to astronomical levels, growth in China’s economy was slowing down, to say the least.

China used to be a country with an export-oriented economy. As the manufacturer of the world, China was shipping all kinds of goods to countries all over the world. Recently, however, the world economy slowed down significantly. And for China, foreign demand was weak. Export numbers have been dismal for quite a while and the Chinese government has been trying hard to boost domestic demand.

The Chinese central bank has lowered its benchmark interest rates four times since last November. Its most recent announcement also lowered reserve ratios for certain financial institutions. However, the economy was still slowing down. The Purchasing Manager’s Index (PMI) suggested that China’s manufacturing sector had been contracting for three consecutive months.

4. Chinese Margin Debt has Hit a Record $358 Billion

Last year’s rally in the Chinese stock market brought along an extremely high level of margin debt—$358 billion, to be exact. At this level, margin debt could be (and already is) causing major disruptions in the Chinese stock market. Due to high margin debt, market downturns resulted in traders forced to sell their shares to cover margin calls. This creates a multiplier effect when the stock market tumbles.

5. Chinese Stocks Trade at 97 Times Earnings

On the Shenzhen Stock Exchange, there is a section called the ChiNext board. The board was intended for innovative and fast-growing companies, especially high-tech firms. So far it has more than 460 companies.

The performance of companies on the ChiNext board has been nothing less than wild. Even after the huge tumbling experience this month, the index is still more than 80% higher compared to a year ago.

The most remarkable fact about the ChiNext board is how much investors are willing to pay for its companies’ earnings. Currently, the price-to-earnings (P/E) ratio for the ChiNext board sits at 97.12, implying that investors are paying 97.12 yuan for one yuan of earnings. During the peak of last year’s rally, the P/E ratio for the board went as high as 146.57.

6. Chinese Stocks are Incredibly Volatile

Let me just show you how the Shanghai Composite Index moved in the last couple of trading days.

Date % Change of Shanghai
Composite Index
June 15 -2.0
June 16 -3.5
June 17 1.6
June 18 -3.7
June 19 -6.4
June 23 2.2
June 24 2.5
June 25 -3.5
June 26 -7.4
June 29 -3.3
June 30 5.5
July 01 -5.2
July 02 -3.5

Note that the Shanghai Composite Index tracks all the stocks (A shares and B shares) listed on the Shanghai Stock Exchange. Moreover, any stock in the Chinese stock market can only go up or down by the 10% daily limit imposed by regulators. Given the limited movement by any single stock and the wide range of companies listed on the exchange, the drastic daily moves prove just how volatile the Chinese stock market is.

7. Chinese Regulators Have Injected Billions of Dollars to Save the Stock Market

The amount of effort to save the stock market has been astonishing. First was the central bank’s effort to cut interest rates and lower the reserve ratio. Then, on Tuesday, thirteen of the largest Chinese fund managers together released a bullish statement about the stock market. However, it only worked on Tuesday. Wednesday’s tumble suggested that the situation cannot be fixed that simply. Therefore, overnight, the authorities took another step.

This time it was cutting brokerage fees. The regulators announced that they were working on a new fee standard for the Chinese A shares. It is possible that starting this August, investors can enjoy 30% less transaction cost when investing in stocks.

In the same evening, the China Securities Regulatory Commission (CSRC) announced its plan to relax the margin debt regulation. According to the new plan, the timing of certain margin calls will be postponed, and so will the forced closing of positions. This was a surprise because the CSRC recently strengthened the rules on margin lending.