Understanding the Chinese stock market

The Chinese stock market, with its unique structure and significant global impact, has been a subject of keen interest for investors around the world. Comprising the Shanghai Stock Exchange (SSE), Shenzhen Stock Exchange (SZSE), the STAR Market, ChiNext, and the Beijing Stock Exchange (BSE), this complex ecosystem offers a wide array of investment opportunities. Each exchange plays a crucial role in China's economic development, showcasing the diversity and innovation of the Chinese economy.

Shanghai and Shenzhen Stock Exchanges are the twin pillars of China's stock market, hosting some of the largest and most established companies in the country across various industries. They have been instrumental in China's efforts to open its capital markets to the world, with initiatives like the Shanghai-Hong Kong and Shenzhen-Hong Kong Stock Connect programs, enhancing global investor access.

The STAR Market and ChiNext serve as China's answer to the NASDAQ, focusing on high-tech and innovative companies. These platforms are designed to support startups and growth-oriented firms, providing them with capital and visibility in a competitive global market. The emergence of these exchanges underscores China's commitment to fostering innovation and technological advancement, critical drivers of its long-term economic growth.

The Beijing Stock Exchange (BSE), the newest addition to China's stock market landscape, underscores a focused effort to nurture SMEs specialising in high-tech and innovative industries. By facilitating easier access to capital, the BSE aims to be a catalyst for growth in this crucial sector, underpinning the broader strategic goal of upgrading the Chinese economy and fostering sustainable development.

Since 2014, the Chinese stock market has witnessed significant volatility, characterised by rapid transitions between periods of rapid growth and sharp corrections. In November 2014, a landmark decision to open up China's stock market opened up to overseas investors marked a pivotal change, aiming to draw foreign capital directly into mainland Chinese companies. This move allowed foreign investors to hold up to 30 percent in a single company on the Shanghai stock exchange, eliminating the need for indirect investment through offshore subsidiaries.

The announcement led to immediate positive reactions in the markets, with Hong Kong's Hang Seng index and the Shanghai Composite Index experiencing notable gains. By mid-May 2015, the Shanghai Composite Index had impressively doubled. However, this rapid growth was unsustainable, leading to a significant market correction starting in June 2015. The Shanghai index lost about a third of its value in a short period, and despite a temporary recovery, by July 2015, it had fallen over 30% from its peak. The Chinese government took immediate action to try to control the downturn. They halted trading on a number of stocks, injected billions into the economy and stopped large shareholders from selling their stocks. Investor confidence seemed to ease for a while but soon the downturn resumed and by August, the index had dropped by over 40% from its June peak. 

Further turbulence was seen in January 2016, with the market experiencing dramatic drops that led to the closure of trading within minutes on two occasions. Reflecting on the numbers, the Shanghai Composite Index escalated from 2117 on August 1, 2014, to a peak of 4612 by May 1, 2015, before descending to 2950 by January 13, 2016. These fluctuations underscore the dramatic and volatile nature of the Chinese stock market in comparison to its global counterparts, highlighting the challenges and opportunities for investors navigating this dynamic landscape.

Recent years have witnessed significant policy interventions aimed at stabilising the market and promoting healthy development. The government's decision against introducing a "T+0" trading mechanism was a move to curb speculation and protect retail investors, reflecting a cautious approach to market reforms. Other measures, such as reducing trading costs and encouraging equity investment, illustrate the multi-faceted strategy employed to invigorate the market amidst challenges, including underperformance in global indices.

The IPO landscape in China has been vibrant, with Shanghai and Shenzhen leading the charge globally in terms of funds raised. This vibrancy is a testament to the strategic issuance of IPOs and the appeal of China's economic prospects to both domestic and international investors. 2023 saw a moderation in the number of IPOs compared to 2022, a strategic move to balance market dynamics. The outlook for 2024 remains optimistic, with expectations of significant capital raising through new listings, indicating robust investor confidence in the A-share IPO market's prospects.

In response to market volatility, the Chinese government and financial regulators have not hesitated to intervene. These interventions have ranged from easing market pressures through brokerage guidance to restricting risky financial practices and buttressing the market with state-backed investments. Such decisive actions, while sometimes controversial, underscore the government's commitment to maintaining market stability and investor confidence.

If you’ve been considering investing in China, you may be questioning whether there is a link between the volatility of the stock market and the health of the Chinese economy. A joint study by Wharton School and Shanghai Jiaotong University found that “The correlation between market returns and future GDP growth for China, however, is ...statistically insignificant.” Despite the downturn on the stock market, the economy is still growing at a rate of around 4.6% and the growth is expected to continue. Figures show growth in retail, tourism, real estate and hospitality industries, and that the stock market dive has had little impact on the Chinese people. With only 12% of household wealth tied up in stock market investment, the Chinese people have sufficient money to spend, boosting the economy.

In summary, the Chinese stock market is more than just a collection of indexes and stock quotes; it is a reflection of China's economic ambitions, regulatory philosophies, and its pivotal role in the global economic order. As the market evolves, it continues to offer valuable insights into the complexities of investing in a rapidly changing global landscape.

If you are looking for business opportunities in China, speak to the team that understands the ways of the Chinese marketplace. The team at Sinorbis will help your business succeed in China, contact us today and we’ll help you make the right moves.