The volatile stock market
Before the onset of the crisis, in 2015, a boom had erupted in Chinas stock market, along with rising ratio of stock market capitalisation to GDP, and the growing contribution of the stock market to circulation of domestic finance. Deviating from the pattern prevailing earlier, the ratio between stock By then, market and bank finance moved up from 3.70 in 2013 to 12.42 in 2017. Qualified FII investors (QFIIs) had been allowed to transact‘A’ (RMB) shares in 2011—2012,3 which generated proportionate increases in the market capitalisations in Shanghai and Shenzen. In the meantime, the real estate and housing boom had already ended, thus prompting the investors to the market for financial assets in the stock market.The boom also got reflected in the rising volume of trading in financial derivatives and the proliferation of financial innovations, which often entailed leveraged financing, with credit advanced by financial institutions based on the respective assessments of the fictitious returns expected under uncertainty. Banks had been providing margin money to large numbers of young middle-class traders during the stock market boom (Hunter 2018).Thus, the boom, part financed with borrowed funds, in effect, brought in a Ponzi mode of finance which crashed as the boom ended by 2014-2015. Chinas stock markets had, however,by then come to the fore as major financial institutions, as in advanced capitalist countries with the emulation of the related repercussions for the economy. Attempt on part of the state to initiate controls on margin lending and related shadow banking practices led to major reversals and further volatility in the stock market (Roach 2019).
As it happened, the boom ended with the stock exchanges of China facing a downturn by 2015 (Peoples Bank of China 2018: 219). Pulling down the Shanghai Composite Index from 5120 to 3806 within a month ending July 9, 2015, the index continued to slide between 3500 and 3700 amid fluctuations despite official interventions (Hunter 2018). The shock wiped out, in less than a month, more than $3 trillion of stockholders’ wealth, caused by sharp downturns in stock prices. The downslide as above was even sharper than the post-Lehman-Brothers’ crisis on Wall Street, when US stocks fell by 41%, over a much longer period, between October 2008 and March 2009 (Sen 2015).
Attempts on part of the state to mitigate the crisis in the financial market achieved limited success. It may be recalled here that earlier downturns in China’s stock exchanges, as took place with the global financial crisis of 2008, were successfully managed, with the state injecting a sum of $585 billion (nearly 7% of Chinas GDP in 2008), along with other measures. In contrast, with de-regulated finance prevalent during the crisis of 2013—2015, the state had limited options for containing the downward trend in the market, as evident, for example, with the Shanghai composite index continuing to hover around as low as 2200 by early 2019.4 Developments as above led to a moderate decline in the stock of official reserves by $930bn between 2016 and 20173 along with frequent downslides in the RMB rate, hitting 6.92 per dollar by October 2018/’
Players in Chinas stock market in 2015 included an unusually active but rather inexperienced retail traders (Roach 2019) — all of domestic origin — a pattern very different from the international institutional investors. Their brisk stock trading was visible in the large number of new accounts opened in the booming period before June 15 and in the sums borrowed as ‘margin money’ to buy stocks in the first half of 2015. This, no doubt, was a precarious if not a Ponzi game, especially when stock prices had already started tumbling downwards since June 2015. Investors, however, were left with little option other than selling further, which exacerbated the impending crisis starting in mid- June of 2015.The consequence was a drop in Shanghai composite index from 5166 on June 12,2015, to 3507 on July 8 and further down to 2927 on August 26,2015 (Lee, 2015).
End of the stock market boom as above which came up in 2015 was also conditioned by the rising uncertainties in China’s financial scene as were caused by some expected changes in the global status of RMB; possibly with its inclusion in the SDR package of IMF and with China’s attempts to turn RMB a convertible currency, which was backed by rich households keen on a diversified portfolio (Sen, 2015).
As with the exchange rate fluctuations, the sharp drop in stock prices led the Chinese state swing back to action, initiating measures which helped to arrest the downslides in the market. Preceded by a drop in the stock index from the high of 5166 on June 12, 2015, to the low of 3052 on September 30, the measures led to recovery at 3580 on November 13, 2015, reaching 2939 by May 30, 2018. The pattern confirm the rather unique relation between the market and the state in China, with the latter both willing and in a position to modify the opening up process; especially with measures designed to regulate the market.