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  • 1. An Analysis of Shanghai Stock Exchange Movement in 2000-2007: Is It A Bubble Pattern? Liu Pei Septian Hario Seto Simon Huang He

2. Agenda

  • Overview: Recent China Economic Indicators
  • Structure And Development Of China Stock Market
  • Recent Movement Analysis On Shanghai Stock Exchange
  • Stock Bubble And Its Pattern

3. Structure and Development of Shanghai Stock Exchange 4. Topic To Be Discussed

  • Overview of China Recent Economic Indicators
  • Structure and Development of Shanghai Stock Exchange

5. GDP Growth and CAB to GDP Ratio 6. Increase Inflationary Pressure 7. Tightening Monetary Policies 8. Negative Interest Rate

  • November year on year inflation rate announced by National Bureau of Statistic of China in 6.9% Vs 6.48 % interest rate on 6 month deposit rateNegative interest rate.

9. Shanghai Stock Exchange (SSE)

  • Founded on Nov. 26th,1990
  • Non-profit-making membership institution
  • Most preeminent stock market in Mainland China

10. Type of shares

  • A share dominated in Yuan. Listed inShanghaiand Shenzhen Stock Exchange. Initialy listed in Nov 1984.
  • B share dominated in US Dollars. Listed in Shanghai and Shenzhen Stock Exchange. Initialy listed in 1992 Feb.
  • H share dominated in HKD, listed in Hongkong Stock Exchange, initialy listed in 1993.

11. More Details About A Shares

  • State-owned shares.
  • Takes most weight, non tradable.
  • Corporation stocks
  • Owned by corporations or social institutions, non tradable .
  • Exchange stocks
  • All tradable stocks holding by individuals and institutions.

12. Limitied Investment Choices

  • Limited Free Float on Shares

13. Variety of functions of SSE

  • Providing marketplace and facilities for the securities trading
  • Formulating business rules
  • Accepting and arranging listings
  • Organizing and monitoring securities trading
  • Regulating members and listed companies
  • Managing and disseminating market information

14. SSE Composite Index

  • Constituents for SSE Composite Index are all listed stocks (A shares and B shares) at Shanghai Stock Exchange.
  • The Base Day for SSE Composite Index is December 19, 1990. The Base period is the total market capitalization of all stocks of that day. The Base Value is 100. The index was launched on July 15, 1991.

15. Strong Growth of Investors and Listing Companies 16. SSE Market Value 17. Recent Movement Analysis on Shanghai Stock Index 18. Topic To Be Discuss

  • Fundamental Reason : Link between Stock Index and GDP ?
  • Other Reason : Link between Stock Index and Government Policy?
  • Market Easy To Be manipulate
  • Decreasing Trend June 2001 April 2005
  • Increasing Trend from May 2005 - Now

19. Link To GDP ? No! 20. Fundamental Analysis

  • Link between GDP and Index Movement? No..!
    • As we could see to the chart
    • From May.2001 to April.2005, Chinas GDP grow on a average base of9%, total growth of84%.
    • And the GDP total growth from11.59billion to22.25billion (US Dollar).
    • But the Shanghai's Index fall down from2245to988 ,total lost of56%

21. Link To Government Policy? Yes!! 29/4/1997 19/5/1999 5/4/1996 29/5/2001 6/6/2005 22. Link To Government Policy? Yes! 6/6/2005 16/10/2007 23. Government Policy Analysis

  • Link between Government Policies and Index movement? Yes!
  • A few major policy changes inside this:
    • 5/4/1996 : First time to low interest rate since 1990
    • 29/4/1997:Forbidden of investment in stock market for listed companies
    • 19/5/1999 :People's Daily :
    • 29/5/2001:The start of reduction of state-owned shares
    • 6/6/2005: The start of Share Reform
    • 16/10/2007 :The end of 17th Conference of CCP

24. Market Easy To Be Manipulate Data: Dec.4, 2007 25. Market Easy To Be Manipulate

  • For example,Petro China :
    • Due to the calculation method of Shanghai Index, its 4953.2 billion RMB total market value contain24.8%of the Index !
    • But only 91.7 billion RMB, which means1.85%could be trade in the market, and the rest share is owned in the government !
    • The government could easily control the whole market.

26. SSE Index Movement 2000-2007 27. The Reason of Decreasing TrendJune 2001- April 2005

  • Privatization of state owned entities (SOE): Initial Public Offering (IPO)
  • The Macro-economical control
  • Improvement on regulation

28. The Reason of Decreasing TrendJune 2001- April 2005

  • The Privatization of SOE: IPO
    • Government was pushing low efficiency SOE to IPO
    • Over value of IPO price.
  • The Macro-Economical control
    • As some state-economist says that 7% should be a Persistent Growth Rate , then the government try to cool down the growth

29. The Reason of Decreasing TrendJune 2001- April 2005

  • Improvement on Regulation
    • In 2001, Ms. Meilun Shi, a well experienced person in Hongkong capital market, becoming new Chief of China Securities and Exchange Comission. Since that time, she introduced many regulations to improve Chinas capital market.

30. The Reason of Increasing TrendMay 2005 - Now

  • IPO : Stop of IPO process
  • The stop of reduction of state-owned shares
  • Share status reform !

31. The Reason of Increasing TrendMay 2005 - Now

  • Stop of IPO process to reform and privatize SOE
    • Finally The Government stop the way to use stock market to help the incurable companies.
    • The Government start to permit small private business to IPO
  • The stop of reduction of state-owned shares
    • In Oct 2001, facing a fall down of 50% in 3 months, it pause. In Jun 2002, it finally stops.
    • It stops the falling down trend, but it does not make the market go up again.

32. The reason of Increase from May.2005

  • Share Reform !
    • Change the status of Non-tradable share, such asState-owned sharesandCorporation stocks
    • The general reform price : Free3shares for every10exchange share
    • The introduction of warrant
    • This is the major reason of the new round of stock market bullish since May 2005

33. Academic Analysis On Bubble And Its Pattern 34. Topic To Be Discuss

  • Academic Research on Bubble
  • Pattern of Stock Bubble
  • Pattern Analysis in China Stock Market

35. Several Definition About Bubble

  • Increase on Stock prices due to expectation of further increase (Schiller, 2005)
  • The level of price changes and fluctuation which can not be explained by asset pricing models which is usually used to measure the effect of fundamentals.
  • Any period when there is sharp decline on assets prices after rising period (Mishkin and White, 2003)

36. Characteristic of Stock Bubble

  • Main Characteristic of Stock Bubble:
  • Stock movement can not be explained by fundamental valuation model
  • Crowd psychologyExcessive Speculation
  • Sharp rise on volatility

37. NIKKEI Bubble Burst 1989-1991 38. NASDAQ Bubbles Burst 1999-2002 39. SSE Index Bubble? 40. Similar Pattern 41. The Highest P/E Ratio In 2007 42. Conclusion 43. Reason To Say Bubble

  • High P/E ratio comparison to another countries.
  • Movement on price could not explain by economic and companies performance.
  • Government Policy play important role on market movement and companies strategies
  • Market very volatile.
  • Very small stock float made market very easy to be manipulate.

44. When It Will Be Burst?

  • Very Difficult to Answer
  • There is no academic research could answer when the bubble will burst.
  • But, we are convinced that current pattern could not last forever.
  • All the market movement is Government Policies driven.
  • Need a smooth transition to avoid bubble burst

45. Bibliography

  • Mishkin, Frederic S and Eugene N. White. 2003. U.S Stock Market Crash and The


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