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August 2015

Recent Developments in China’s Stock Markets Published by: Ali Dagli (Partner), Okan Inaltay (Analyst), Zepeng “Frank” Wu (Intern)

Table of Contents


Recent Developments in China’s Stock Markets


GP Bullhound Update


Executive Summary on China’s Stock Market Developments Margin Balance

After the Global Financial Crisis of 2007-2008, China’s stock market remained stable

China’s markets are too big to ignore: as of May 2015, 3 of the world’s 6 largest stock exchanges are Chinese (including Hong Kong as the 6th largest)

China’s markets started their dramatic rise in November 2014 and after just 7 months in June 2015, reached their highest levels since 2008

This was a $8 trillion (125%+) increase in less than 1 year and half the companies listed on the Shanghai and Shenzhen exchanges were priced above 85x earnings

With the one month plunge in June 2015, China’s stock markets in total lost $4 trillion; >2x the size of India’s entire stock market and >15x of total GDP in Greece

The major cause for the massive decline was the deleveraging process of the colossal amount of margin trading

Shanghai Composite

― When stock prices fell, investors who bought stocks with borrowed money had to either increase their margin or liquidate their positions ― As investors liquidated their positions, the stock prices fell further, which prompted more investors to liquidate their positions, resulting in an ever-accelerating downward spiral

Shenzhen Composite

― The deleveraging process slowed down due to a large number of company trading suspensions and Chinese government’s actions

Hang Seng Index

1 year period






After unprecedented levels of Chinese government actions, China’s markets rebounded and stabilized a bit, before crashing again on August 24 dubbed “Black Monday” – Over 80% of the stocks listed in Shanghai were down by more than 10%

China’s stock market developments should draw Western investors’ attention, as declines on China’s exchanges negatively affected US-listed Chinese companies during the last 3 months, especially Sohu (-35%), Youku (-48%), and Sina (-23%)

The increased market volatility also poses question on whether the wave of US-listed Chinese companies delisting in the US and relisting in China will continue

With the recent market volatility and significant decline in valuations, publicly-listed Chinese companies that are aggressive with overseas acquisition plans will likely shift to more cashbased acquisition strategies

Although the GDP in China continues to grow at a healthy rate (7.7% vs 5.0% in India and 2.2% in US) and the amount available for trading is still a relatively small portion of GDP (1/3rd compared with 100%+ in western markets)…

…questions still remain on whether or not state intervention failed, how far this could go, and how badly these recent developments damaged confidence of Chinese (85% is retail) and foreign investors (only 2% of total) in Chinese equity markets – and more importantly confidence in the Chinese government

Sources:, CapitalIQ,,,,,,,,, and Notes: $ represents USD


Overview of Largest Chinese Stock Exchanges & Nasdaq Shanghai Stock Exchange

Shenzhen Stock Exchange

China’s largest stock exchange by market capitalization; world’s $5.90 trillion (end of May 2015)