The 2015-2016 Chinese stock market turbulence began with the popping of a stock market bubble on 12 June 2015 and ended in early February 2016. A third of the value of A-shares on the Shanghai Stock Exchange was lost within one month of the event. Major aftershocks occurred around 27 July and 24 August's "Black Monday". By 8–9 July 2015, the Shanghai stock market had fallen 30 percent over three weeks as 1,400 companies, or more than half listed, filed for a trading halt in an attempt to prevent further losses. Values of Chinese stock markets continued to drop despite efforts by the government to reduce the fall. After three stable weeks the Shanghai index fell again by 8.48 percent on 24 August, marking the largest fall since 2007.
At the October 2015 International Monetary Fund (IMF) annual meeting of finance ministers and central bankers from the IMF's 188 member-countries held in Peru, China's slump dominated discussions with participants asking if "China’s economic downturn [would] trigger a new financial crisis".
By the end of December 2015, China's stock market had recovered from the shocks and had outperformed S&P 500 for 2015, though it was still well below the 12 June highs. By the end of 2015, the Shanghai Composite Index was up 12.6 percent. In January 2016, the Chinese stock market experienced a steep sell-off and trading was halted on 4 and 7 January 2016 after the market fell 7%, the latter within 30 minutes of opening. The market meltdown set off a global rout in early 2016.
According to 19 January 2016 articles in the Xinhua News Agency, the official press agency of the People's Republic of China, China reported a 6.9 percent GDP growth rate for 2015 and an "economic volume of over ten trillion U.S. dollars". A Forbes journalist argued that the "stock market crash does not indicate a blowout of the Chinese physical economy." China was shifting from a focus on manufacturing to service industries and while it had slowed, it was still growing by 5%. After this period of turbulence, the Shanghai Composite Index was stable around 3,000 points as of January 2017, 50% less than before the bubble popped.
Publishing in 2024, academic Frances Yaping Wang observed that early 2016 speculation of an economic collapse turned out to be wrong and that the turbulence ended up far from a real crisis.
Background
Following a period of encircling by the western powers during the early history of the People's Republic of China, the modern stock market in China reemerged in the early 1990s with the re-opening of the Shanghai Stock Exchange, and founding of the Shenzhen Security Exchange. By 2000, the Chinese stock market had over 1,000 listed companies, worth a market capitalization of nearly a third of China's overall gross domestic product (GDP), and by the end of 1998, investors had opened nearly 40 million investment accounts. As more companies went public, investors rushed to the Shanghai and Shenzhen exchanges. The Chinese stock market and economy grew quickly, and by 2012, the number of listed companies between the Shanghai and Shenzhen Securities Exchanges had risen to over 2,400, worth a market capitalization of nearly 50% of China's real GDP, and included over 200 million active stock and mutual fund accounts.
China's economic growth, however, was stunted by the 2008 global recession and its aftershocks. The Chinese government responded to 2008 recession with a stimulus package that would draw resources from both the public and private sectors in order to fund an unprecedented infrastructure build. Growth following the stimulus package was rapid – from 2009 to 2011, real GDP growth in China grew at approximately 9.6%, though in the two years that followed, real GDP growth fell to 7.7%.
Seeing the opportunity for a nationwide reinvestment into the economy through the stock market, the government developed a campaign that would entice every day citizens to trade – it was referred to as "Zhongguo meng" (中国梦), which translates to the Chinese Dream. First conceived and pushed by China's paramount leader and general secretary, Xi Jinping, the 'dream' was one of overall economic prosperity and an elevated international status.
The trading population that developed in China differed in important ways from those elsewhere in the world. In China, the stock market trading activity is dominated by individual investors (close to 85%) – also known as 'retail investors.' Indicative of the sheer size of investor inflow into the markets, after several months of a bull market developing in China, more than 30 million new accounts were opened by retail investors in the first 5 months of 2015, according to data from the China's Securities Depository and Clearing Corp. And while a larger, more active investing population generally means greater market capitalization, many of these new traders were inexperienced and easily manipulated by the buying frenzy, with nearly two-thirds having never entered or graduated high school, according to a survey by China's Southwestern University of Finance and Economics. As a result, momentum and rumors among the traders carried more weight than reason when it came to investing decisions, creating a trend of impulsive buying and overvaluation in the market.
Leading up to the crash, in an attempt to free up additional money for trading, the China Securities Regulatory Commission (CSRC), responsible for proposing and enforcing securities laws, had loosened several related financial regulations. Prior to significant policy reform in 2010, the act of selling short – essentially, borrowing and selling stock with the belief that its price will fall – and trading on margin – trading with debt – were strictly prohibited in China. However, in March 2010, China implemented a testing phase for their stock exchange in which 90 selected companies were authorized to be sold short and traded on margin. This list was expanded over time, with over 280 companies being given the same authorization in late 2011. Shortly thereafter, the CSRC implemented a total policy shift which legalized both practices across the entire stock market. These regulation changes led to significant increases in borrowing for the purpose of trading, and short selling became the most popular investing strategy among traders. From 2010, when the changes were implemented, to 2012, average daily short turnover increased from 0.01% to 0.73%, and average daily margin purchase turnover increased from 0.78% to 5.15%. As a result, the Chinese market was being flooded with debt-funded trades and risky short selling plays.
To make matters worse, the CSRC also became a regulatory bystander, refusing to take action that would upset the political and social stability of the time. Instead of de-listing public companies that failed to perform for three consecutive quarters – a well-known regulation in China – the CSRC would regularly let those companies slide for fear of upsetting the shareholders. This added to the flames of bad investing, allowing investors to continue pouring their money into companies that were underperforming and overvaluing shares that were essentially worthless on the books.
2015
Chinese RMB According to SWIFT data, by November 2014 China's renminbi (RMB) – also known as the yuan – "became one of the world's top five payment currencies...overtaking the Canadian dollar and the Australian dollar".
On 11 August, two months after the turbulence, the People's Bank of China devalued the RMB – by 1.86 percent to CN¥6.2298 per US dollar. A lower renminbi (RMB) "makes China’s exports more competitive in foreign markets, offsetting part of the surge in the country’s blue-collar wages over the last decade; and it makes foreign companies, houses and other overseas investments seem more expensive." On 14 August, the central bank devalued it again to CN¥6.3975 per US dollar. In August there was speculation about the causes of the devaluation of the yuan and the changes in the Chinese economy in 2015, including the "growth in its services sector rather than heavy industry". By mid-January 2016, an article in The Economist argued that the strains on the yuan indicated a problem with China's politics. However, a spokesperson for the International Energy Agency (IEA) argued that the risk was "overplayed". During the drastic sell-off on 7 January 2016 China's central bank, the People’s Bank of China set the official midpoint rate on RMB to its lowest level since March 2011—at CN¥6.5646 per US dollar.
On 8 October 2015 China launched a new clearing system developed by the People’s Bank of China (PBOC) – Cross-Border Inter-Bank Payments System (CIPS) – to settle cross-border RMB transactions and intended to "increase global usage of the Chinese currency", by "cutting transaction costs and processing times" and removing "one of the biggest hurdles to internationalizing the yuan". Because of the stock market turbulence, the launch had been delayed and CIPS was '"watered down," offering a "complementary network for settling trade-related deals in the Chinese currency to a current patchwork of Chinese clearing banks around the world".
By December 2015, the RMB was still the "fifth most used global payments currency and the second most used currency for trade finance" with 27 per cent of China's goods invoiced in RMB compared to 19 per cent in 2014. In December China was the world's largest exporter. By October 2016, the Renminbi will be added to the special drawing rights currency basket, the foreign exchange reserve assets defined and maintained by the International Monetary Fund, which includes the U.S. dollar, Euro, Japanese yen and pound sterling. The IMF's decision to add the RMB to the SDR, was "crucial to global financial stability" as it would encourage China to "continue to be a responsible global citizen and liberalise its exchange rate, while intervening to ensure a gradual decline".
China's PMI
In August 2015, Caixin Media – a closely watched gauge of nationwide manufacturing activity – announced that the China Purchasing Managers' Index (PMI) had declined to 51.5. This was the beginning of a decline that continued into December 2015 with the PMI falling below 50 – anything below 50 indicates deceleration. PMIs are economic indicators derived from monthly surveys of companies' purchasing managers and produced by the financial information firm, Markit Group, which compiles the survey and conducts PMIs for over 30 countries worldwide. From 2010 to 2015 HSBC had sponsored Markit's China PMI, but that relationship ended in June and Caixin stepped in.
By 2016 the PMI was down for the fifth month indicating a cooling in manufacturing in China. Manufacturing activity is a key sign of economic performance. December was the tenth month in a row that manufacturing in China had contracted raising concerns that China's economy was not on steadier footing. It was seen as the most recent indication of slowing global economic growth. Since China is the world's largest metal consumer and producer, and "the world’s second largest economy", the China PMI is closely watched. This 2016 selling frenzy was fueled by the most recent private survey of factory activity, the December 2015 report by Caixin on China's PMI reading which showed that China's manufacturing activity had slowed again in December 2015 to a PMI reading of 48.2 – with anything below 50 indicating deceleration.
Stock market bubble
In the year leading up to the turbulence, following the trends in the west, enthusiastic individual investors inflated the stock market bubble through mass amounts of investments in stocks often using borrowed money, exceeding the rate of economic growth and profits of the companies they were investing in.
Investors faced margin calls on their stocks and many were forced to sell off shares in droves, precipitating the turbulence.
2015 Government response