An Analysis of Shanghai Stock Exchange Movement in 2000-2007: Is It A Bubble Pattern?

Liu Pei

Septian Hario Seto

Simon Huang He

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

Structure and Development of Shanghai Stock Exchange

Topic To Be Discussed

Overview of China Recent Economic Indicators

Structure and Development of Shanghai Stock Exchange

GDP Growth and CAB to GDP Ratio

Increase Inflationary Pressure…

Tightening Monetary Policies

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 rate Negative interest rate.

Shanghai Stock Exchange (SSE) Founded on Nov. 26th,1990 Non-profit-making membership institution Most preeminent stock market in Mainland

China

Type of shares

A share dominated in Yuan. Listed in Shanghai and 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.

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.

Limitied Investment Choices

NO MORTGAGE MARKET NO FOREIGN EXCHANGE MARKET PROHIBITED TO SHORT Limited Free Float on Shares

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

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.

Strong Growth of Investors and Listing Companies

SSE Market Value…

Recent Movement Analysis on Shanghai Stock Index

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

Link To GDP ? No…!

Fundamental Analysis Link between GDP and Index Movement…?

No..!• As we could see to the chart• From May.2001 to April.2005, China’s GDP grow

on a average base of 9%,total growth of 84%.• And the GDP total growth from 11.59 billion to

22.25 billion (US Dollar).• But the Shanghai's Index fall down from 2245 to

988,total lost of 56%

Link To Government Policy? Yes…!!

29/4/1997

19/5/1999

5/4/1996

29/5/2001

6/6/2005

6/6/2005

16/10/2007

Link To Government Policy? Yes…!

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: <A correct understanding of the

current stock market>• 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”

Market Easy To Be Manipulate

Data: Dec.4, 2007

12.84%3294.47422.95MetalAluminium China60160

8.61%3886.89334.76BankBank of Communications60132

39.12%4838.481892.8BankChina Commercial Bank60003

16.82%5594.36940.88InsurancePing An of China60131

7.64%10623.53811.69EnergyChina Shenhua Energy60108

2.93%11700.48342.67BankBank Of China60198

4.32%12108.88523.35InsuranceChina Life60162

12.16%15096.151834.94EnergySinopec China60002

4.81%20453.43983.33BankICBC60139

1.85%49531.96917.7EnergyPetro China60185

PercentageTotalValue

TradingValue

TypeCompanyCode

Market Easy To Be Manipulate For example, Petro China:

• Due to the calculation method of Shanghai Index, it’s 4953.2 billion RMB total market value contain 24.8% of the Index !

• But only 91.7 billion RMB, which means 1.85% could be trade in the market, and the rest share is owned in the government !

• The government could easily control the whole market.

SSE Index Movement 2000-2007

The Reason of Decreasing Trend June 2001- April 2005

Privatization of state owned entities (SOE): Initial Public Offering (IPO)

The “Macro-economical control” Improvement on regulation

The Reason of Decreasing Trend June 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

The Reason of Decreasing Trend June 2001- April 2005

Improvement on Regulation • In 2001, Ms. Meilun Shi, a well experienced per

son in Hongkong capital market, becoming new Chief of China Securities and Exchange Comission. Since that time, she introduced many regulations to improve China’s capital market.

The Reason of Increasing Trend May 2005 - Now

IPO : Stop of IPO process

The stop of reduction of “state-owned

shares”

Share status reform !

The Reason of Increasing Trend May 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.

The reason of Increase from May.2005

Share Reform ! • Change the status of “Non-tradable” share,

such as State-owned shares and Corporation stocks

• The general reform price : Free 3 shares for every 10 exchange share

• The introduction of warrant• This is the major reason of the new round of

stock market bullish since May 2005

Academic Analysis On Bubble And Its Pattern

Topic To Be Discuss

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

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)

Characteristic of Stock Bubble

Main Characteristic of Stock Bubble: Stock movement can not be explained by

fundamental valuation model Crowd psychology Excessive

Speculation Sharp rise on volatility

NIKKEI Bubble Burst 1989-1991

NASDAQ Bubbles Burst 1999-2002

SSE Index Bubble…?

Similar Pattern…

The Highest P/E Ratio In 2007

Conclusion

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.

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

Bibliography Mishkin, Frederic S and Eugene N. White. 2003. U.S Stock

Market Crash and Their Aftermath. MIT Press: Massachucetts.

Schiller, Robert J. 2005. Irrational Exuberance: Second Edition. Currency Double Day: New York

Asian Development Bank Report : Asian Economic Monitor December 2007. www.adb.org

www.finance.yahoo.com www.ft.com www.stats.gov.cn www.sse.com.cn