August 2015

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

Table of Contents

1

Recent Developments in China’s Stock Markets

2

GP Bullhound Update

2

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

8/24/2014

11/24/2014

2/24/2015

5/24/2015

8/24/2015



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: Bloomberg.com, CapitalIQ, Economist.com, FactSet.com, Eastday.com, Forbes.com, FT.com, Money.cnn.com, SSE.com.cn, SZSE.cn, and WSJ.com Notes: $ represents USD

3

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)