FOREIGN TRADE UNIVERSITY

INTENATIONAL ECONOMICS FACULTY

-------------------

MID-TERM ESSAY

TOPIC: CHINESE STOCK MARKET TURBULENCE(2015-2016)

AND ITS IMPACT ON GLOBAL ECONOMY

Class: TCHE 414.1 Group 20

Lecturer: Assoc. Prof. Mai Thu Hien

Hà Nội, 03-2019
 MEMBERS OF GROUP

STT NAME STUDENT ID

1 Đào Nguyễn Anh Duy 1613340025
2 Vũ Hữu Quyền 1613340141
3 Nguyễn Ngọc Lâm 1613340049
4 Nguyễn Tân Vũ 1613340100
5 Trương Hồng Cảnh 1613340019

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Table of Contents:
I. Introduction ................................................................................................................... - 4 -
1.1. Rationale of research: ................................................................................... - 4 -
1.2. Research objectives:...................................................................................... - 4 -
1.3. Research methodology: ................................................................................ - 4 -
II. Content ........................................................................................................................... - 5 -
2.1. Chapter 1: The turbulence of Chinese stock market ................................. - 5 -
2.1.1. Literature Review .................................................................................... - 5 -
2.1.2. Reasons lead to Chinese stock market turbulence ................................ - 5 -
 Background ................................................................................................... - 5 -
2.1.3. How the incident affected Chinese domestic economy ....................... - 10 -
2.2. Chapter 2: The turbulence impacts on global economy .......................... - 18 -
2.2.1. Overview of the global economy from 2015 to 2016 ........................... - 18 -
2.2.2. Lesson for Vietnam ................................................................................ - 21 -
III. Conclusion ............................................................................................................... - 23 -
IV. Reference ................................................................................................................. - 24 -

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I. Introduction
1.1. Rationale of research:
The aim of this research is to analyze the information transfer in Chinese stock market
around the crash of 2015-2016, and to reveal the impacts of this crash on the interactions
between sectors. To the best of our knowledge, this question has not been studied
systematically in the existing literature.
1.2. Research objectives:
After decades of rapid growth, China has become the world’s second largest economy.
It plays an important role in global trade. However, its stock market has displayed poor
performance since the US subprime crisis. Under the background of deepening economic
reform, the Chinese stock market began to boom around July 2014. Tens of millions of new
investors entered the market. The great majority of them were retail investors, which tended
to exhibit herd behavior. Moreover, many of these novice investors engaged in leveraged
trading through various channels, for example margin financing of brokerages, shadow
banking, or grey-market (over-the-counter, OTC) margin lenders. Huge amounts of borrowed
money flooded into the market. The Shanghai stock exchange composite index (SSECI)
soared from 2050.38 on 1 July 2014, to a peak of 5166.35 on 12 June 2015. It increased about
152% in just one year. However, after the peak, the market plunged drastically. From late
June to late August of 2015, the SSECI declined about 40%. It was one of the biggest falls in
global stock market history. In order to stabilize the market, the Chinese government took a
series of actions, including organizing state-backed financial firms collectively called the
“national team” to buy stocks directly, banning short sales, stopping new initial public
offerings, etc. Through these efforts, the market turbulence ended in February 2016. This
crash brought heavy losses to Chinese investors and the economy. Market capitalization up to
trillions of US dollars evaporated. It also impacted the world markets.

1.3. Research methodology:

Analyzing information transfer is one of the fundamental subjects for complex system
studies. It characterizes the interactions between components and provides important insights
into the structure and dynamics of the system. This issue attracts many researchers from
different fields, for instance neuroscience, physics, climatology, and zoology, etc.

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II. Content
2.1. Chapter 1: The turbulence of Chinese stock market
2.1.1. Literature Review
China is the world’s largest investor and greatest contributor to global economic
growth by wide margins, and will remain so for many years. The efficiency of its financial
system in allocating capital to investment will be important to sustain this growth. This paper
shows that China’s stock market has a crucial role to play. Since the reforms of the last
decade, China’s stock market has become as informative about future corporate profits as in
the US. Moreover, though it is a segmented market, Chinese investors price risk and other
stock characteristics remarkably like investors in other large economies. They pay up for
large stocks, growth stocks, and long shots, and they discount for illiquidity and market risk.
China’s stock market no longer deserves its reputation as a casino. In addition, the trend of
stock price informativeness over the last two decades is highly correlated with that of
corporate investment efficiency. China’s stock market appears to be aggregating diffuse
information and generating useful signals for managers. On the buy side, because of its low
correlation with other stock markets and high average returns, China’s stock market offers
high alpha to diversified global investors who can access it. Yet this high alpha amounts to an
inflated cost of equity capital, constraining the investment of China’s smaller, more
profitable enterprises. Further reforms that open this market to global investors and improve
stock price informativeness will be important to increase China’s investment efficiency and
fuel its continued economic growth. Finally, we interpret the stock market’s recent gyrations
through the lens of this research, arguing that its post-crisis lag was a rational downward
adjustment to competition from the rapidly expanding shadow banking sector, and its
enormous rally last year is a cheer for the roll out of deposit insurance and other Third
Plenum reforms. More than ever, China’s stock market is a crucial counterpart to its
extraordinary, relationship-driven, but opaque banking sector. China’s stock market may now
be the world’s most important crystal ball.
2.1.2. Reasons lead to Chinese stock market turbulence
 Background
Following a period of closure 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
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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 everyday citizens to
trade – it was referred to as "Zhong-guo-meng", which translates to the "Chinese Dream".
First conceived and pushed by the President of China, 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.

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 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 delisting 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.

 The cause

Before reaching the ceiling on June 12, 2015, China’s stock market had ballooned
about 150 percent in a year. The Chinese stock market crash began with the popping of the
stock market bubble in mid-June (starting on June 15, 2015). A third of the value of A-shares
on the Shanghai Stock Exchange was lost within one month following the event. The Bank of
England gave a frightening illustration of the enormous scale of the Chinese stock market
rout, stating that the $2.6 trillion wiped off the Shanghai and Shenzhen Composite indexes in
the initial 22-day summer market rout is equivalent to the entire GDP of the UK in 2013, and
amounts to seven and a half times the nominal value of outstanding Greek government debt.
The carnage did not end in 22 days. Major (more severe) aftershocks occurred around July 27
(the Shanghai Composite Index fell by 8.5 percent, marking the largest fall since 2007) and
again on August 24 “Black Monday” (8.5% fall in the Shanghai Composite Index) and
August 25 “Black Tuesday” (another 7.6% fall). As of this writing, as can be seen in the
following charts 1 and 2, the market seems to have calmed down with the index hovering
around 2900 points (compared to 5178 peaks reached on June 12). However, this relative
quietness, along with shares languishing in their lows and low trading volume and volatility,
shows that the market is now left in the doldrums, and is likely to be stuck for a long time.
Altogether, last summer’s herd stampede has practically erased the Chinese stock market
gains in the first half year of 2015 completely.
The source of any stock market crash may vary over specific circumstances, but one
general reason remains generically the same: What goes up must come down. Thus we need
to understand what caused the bubble in China’s stock market to form (buying frenzy) and
pop (panic selloff). Between June 2014 and June 2015, China’s Shanghai Composite index
rose by 150 percent. There was a strong sign that the seemingly bull market was actually
entering the bubble territory as it is not justified or consistent with the economic
fundamentals. The value of many shares rose at a rate and speed that made little sense. Many
companies with meager earnings (or even losses) were seeing a meteoric rise in their shares.
Meanwhile, the country’s broader economy was going the other way, with economic growth
slowing down significantly (the economic growth rate has fallen from double-digit figure in
previous years to 7%, dubbed the “New Normal” by Xi-Li leadership.) In other words, in a
healthy market, stock market booming usually signals an economic expansion. But the

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Chinese economic growth has been declining in the past few years and was not expected to
go back to the brisk growth in the near future. Therefore, the 2014-2015 run-up was clearly a
bubble without support from the real economy.
A big reason for the stock market rally was that a lot of ordinary Chinese people began
investing in the stock market for the first time. More than 40 million new stock accounts were
opened between June 2014 and May 2015. Unlike other major stock markets, which are
dominated by professional money managers, retail investors account for around 85 percent of
China’s trade. “A majority of the new investors in China’s market don’t have a high school
education (6% are illiterate). There are now more retail investors in the Chinese stock market
(90 million) then there are members of China’s Communist Party (88 million)”, as reported
by Reuters. These inexperienced retail investors dramatically increased the volatility of the
market leading to much greater fluctuations in the stock market than would otherwise be the
case. This is because of they, unlike institutional investors who are professionals engaging in
long-term investments on the basis of rational market analysis and projections, typically
engage in short-term speculations based on hearsays, rumors, and irrational projections. As a
result, they tend to exhibit herd behavior causing much greater share price fluctuations than
would otherwise be the case. Worse yet, many of these novice investors were making highly
leveraged purchases with borrowed money.
This practice, known as “trading on margin”, used to be prohibited in China. But then
the Chinese government lifted the prohibition changing policy to strictly regulate the practice
of margin trading. Over the past five years, the Chinese authorities have gradually relaxed the
restrictions on margin trading. The newly relaxed rules still included an important safeguard,
though: a 2-to-1 margin requirement said that only half of invested funds could be borrowed.
The investor needed to put up the rest of the funds herself. There were also restrictions on
which stocks you could buy and how long the money could be borrowed―rules designed to
prevent speculative mania from getting out of hand. However, people also found a number of
creative ways to evade these requirements. As a result, many people have been able to make
even riskier bets than the official rules allowed.
The borrowed money flooded into the Chinese stock market between June 2014 and
June 2015, helping to push stock prices up 150 percent. During this period, the amount of
officially sanctioned margin trading in the Chinese stock market ballooned from 403 billion
yuan to 2.2 trillion yuan. Experts estimated that another 2 trillion yuan or so of borrowed
money has flowed into the markets using vehicles designed to skirt official limits on margin
trading. So, margin trading―and margin debt―skyrocketed, and a perfect storm was
forming.
The surge in stock prices alarmed Chinese authorities. Earlier this year they took steps
to rein in margin trading and other forms of leveraged investing. In January, they raised the
minimum amount of cash needed to trade on margin. They also punished a dozen companies
for failing to enforce rules on margin trades. In April the government cracked down on
vehicles designed to skirt the margin trading rules. The government’s toughest measures

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came on Friday, June 12, when China’s securities regulator announced a new limit on the
total amount of margin lending stock brokers could do, while also reiterating the curbs on
illicit margin trading. Looking back, this announcement acted as the last straw and triggered
the market to fall on the following Monday. When the market nose-dived, investors faced
margin calls on their stocks and many were forced to sell off shares in droves, precipitating
the crash further. Now the bubble has popped.

So on the surface, it looks as though the retail investors are to be blamed for their own
irrational exuberance that caused the crash. But beneath the surface, the Chinese government
is not without fault (if not to be faulted as the culprit, at least to be blamed for
mismanagement). The crash also reflects the underlying structural problems of the economy.
In the recent past years (especially since the 2008 great recession), Beginning in the early
1990s China has achieved two decades of remarkable double-digit growth. But it is
increasingly clear that this export and investment-led growth is not sustainable without
substantial restructuring and rebalancing of the economy. Then came the 2008 great
recession, causing global demand to fall precipitously and China could no longer keep its
growth going through exports. And its own citizens weren’t consuming enough to create the
demand necessary to keep the growth engine revving either. The Chinese government’s
answer was to mount a massive stimulation package, using monetary policy, state-owned
banks, local governments, and other tools under its control to push internal investment. The
result was a massive buildup in factories, highways, airports, real estate, and much more.
Some of these investments were wise. Many weren’t. China has become famous for its
profusion of empty stadiums, skyscrapers, and ghost cities. The result is a lot of
overcapacities and many state-owned enterprises and local governments are ridden with
enormous bad debt. This is part of why the Chinese government encouraged the stock market
boom. As said by an analyst, “The Chinese government basically comes up with this plan.
They see they have these heavily indebted companies that need to raise money to clean up
their balance sheets. They realize there are these huge savings in China that can be put into
the stock market. So they begin talking up the stock market and they make it easier to use
margin debt. And margin debt exploded.”
In a sense, the stock market boom was caused by government’s strategy to solve the
debt problem of zombie state-owned enterprises and the government’s (China Securities
Regulatory Commission) facilitation of margin trading by relaxing the previous restrictions.
This coincided with the timing when the Chinese property market went down, and people
who were putting their money in property began looking elsewhere for better returns. Lots of
novice investors got into the stock market because the Communist Party, in word and deed,
was pushing them into a debt-fueled binge in the stock market. State media also played a
prominent role in drumming up the stock market bubble in the first place. The official Xinhua
News Agency published eight articles on the stock market in a space of three days in early
September 2014 to solicit investors joining the historic gambling, and in March 2015, the
CCP’s mouthpiece People’s Daily issued a three-article series, “A Share Volatility [Is Part of]
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a Slow Bull; [Index] Expected to Challenge 4000.” As the Economist puts it, “The
government got all of the corporations in China that were going broke to go public. Then,
they got the average Chinese citizen to invest.” and “Officials are seen to have promised the
population a bull market, only to lure them into a bear trap” (quoted by James Richards in his
blog posted on August 10, 2015, at Daily Reckoning.com).

2.1.3. How the incident affected Chinese domestic economy

a. The Shanghai stock market crash
The Chinese stock market turbulence began with the popping of the stock market bubble
on 12 June 2015 and ended in early February 2016.
In August 2015 the Shanghai Composite Index (SCI) fell by more than 20 %. The losses,
concentrated at the end of the month, represented the second significant market drop in less
than two months, following a similar plunge in July. The rout has been dramatic, but so had
the gains; the recent period of financial turbulence in China has come of the heels of
remarkable increases: the Shanghai stock market grew by more than 150 % between June
2014 and June 2015. In this summer’s crash, Chinese investors have lost about EUR 5
trillion – a sum higher than China’s entire market capitalisation in 2012. In the weeks since
the SCI reached its 12 June peak, the index has lost more than 40 % of its capitalisation. The
smaller and technologically-oriented Shenzhen Stock Exchange (STE) has suffered even
higher losses, nullifying all its 2015 gains

Shanghai composite index (2014-15)

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 Yet as dramatic as the drop has been, the effects of the recent financial crash on the
Chinese economy have been relatively limited. This is largely due to the nature of investors
exposed to losses: in China, stocks account for less than 15 % of household financial assets.
Just 5 to 10 % of Chinese citizens are in fact exposed to such market fluctuations. By
comparison, 55 % of US citizens have savings invested in stocks. Moreover, most Chinese
investors belong to the middle and upper classes and have benefitted from significant gains
made in the hectic months that preceded the burst: the bubble has burst, but valuations still
remain above their levels of one year ago.
Coupled with a more general slowdown in the Chinese economy – whose growth
rates are projected to hover around 7 % over the next five years, lower that the double-digit
growth recorded for about two decades – the stock markets’ disturbance has greatly reduced
foreign investors’ confidence in China’s model of development. The crash has also cast
serious doubt on Beijing’s management of the financial markets. Even more disconcerting
than the recent stock market crisis, however, is the fundamental crisis of the Chinese
economic model. This issue deserves a careful analysis to understand the long-standing
implications on global economic growth.

 Chinese RMB
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".

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 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 is 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 Purchasing Managers' Index (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.

b. Chinese government’s reaction

The Chinese government enacted many measures (more than 40 and counting) to stem the
tide of the crash. Regulators limited short selling under threat of arrest. Large mutual funds
and pension funds pledged to buy more stocks. The government stopped initial public
offerings. The government also provided cash to brokers to buy shares, backed by central-
bank cash. State-run media continued to persuade its citizens to purchase more stocks. In
addition, China Securities Regulatory Commission (CSRC) imposed a six-month ban on

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stockholders owning more than 5 percent of a company's stock from selling those stocks.
Further, around 1300 total firms, representing 45 percent of the stock market, suspended the
trading of stocks starting on July 8.
The following is a chronological listing of all the different policy buttons China has
pressed on its financial crisis console since stocks started unraveling after mid-June

June 27
1) China’s central bank, People’s Bank of China, cuts interests rate by 0.25%. June 30
2) Asset Management Association of China (AMAC) requests investors and fund
managers to stay rational and not to panic.
July 2
3) Brokers loosen margin financing requirements; the practice of lending to retail
investors who use the money to trade shares.
4) State Council decides to suspend large public share offerings until Shanghai Composite
Index of shares returns to 4500 level.
5) Police investigate three media outlets for spreading rumors and the government vows
to impose heavy penalties for manipulation. Government-run news sources Xinhua and
People’s Daily both publish articles calling for investors’ confidence.
July 3
6) Margin financing: some brokers lower threshold and loosen policy again.
7) Crackdown on short selling and several brokers suspended the business.
July 6
8) China Financial Futures Exchange (CFFEX) restricts index future trading.
9) China Securities Finance Corporation (CSFC) to use funds contributed by various
brokers to buy exchange traded funds. Social Securities Fund (SSF) vows not to reduce
existing equity positions in its portfolio.
July 7
10) China Insurance Regulatory Commission (CIRC) allows insurers to invest more in
blue-chip stocks.
July 8
11) PBOC vows to maintain market stability and avoid systematic financial risk. It will
provide ample liquidity to CSFC via interbank lending, financial bond, pledged financing,
and relending facilities.
12) CSFC grants credit to 21 brokers via pledged stocks to allow them to buy more
equities.
13) CSFC invests in mid cap stocks via mutual funds.
July 9
14) China Securities Regulatory Commission (CSRC) suspends reviews of share
offerings.
15) China Banking Regulatory Commission (CBRC) allows banks to roll over matured
loans pledged by stocks.
16) Minister of Public Security & CSRC investigates “malicious” short selling activities.
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 17) CSFC says it will purchase mutual fund products to stabilize liquidity.
July 13
18) CSRC probes trading system vendor Hundsun Tech for allowing illegal margin
financing.
19) China tightens rules on futures trading.
July 15
20) CSDC to extend business hours for major shareholders to increase their own
companies’ stock holdings.
July 16
21) CSRC demands brokers’ proprietary trading to maintain net purchase on daily basis
and it will allow brokers equity investment to exceed risk limit during special period.
July 17
22) CSFC receives RMB 1.3 trillion from 17 commercial banks.
July 20
23) CSRC clarifies that government money will not be exiting the stock market.
July 27
24) CSRC denies rumor that state buying has stopped.
July 30
25) CSFC grants Rmb200 billion liquidity to five mutual funds.
26) CIRC urges insurers not to net sell equities in near future and demands daily report on
equity holdings.
27) China Securities Depository and Clearing Co., Ltd. (CSDC) cuts fees.
August 3
28) CSRC investigates electronic trading; 24 funds suspended for 3 months.
29) Shanghai Stock Exchange (SHEX) and Shenzhen Stock Exchange (SZEX)
significantly raise commission to discourage program trading.
30) Policy banks announce RMB 1 trillion bonds to support infrastructure and
construction in coming years.
31) Stock markets change settlement dates to discourage speculative short-selling and to
mitigate intraday volatility.
August 7
32) Speculation that CSFC has war chest of RMB3 trillion to invest in stock market.
33) CSRC vows to crack down on margin financing and illegal short selling.
August 11
34) PBOC adjusts currency fix, devaluing by 3%. Four out of five of the CSFC-invested
mutual funds have started investing in A-share stock market.
August 14
35) CSFC publishes its exit plan: Part of its stock holding will be transferred to Huijin;
CSFC says it won’t exit the stock market over the next few years.
36) Ministry of Finance (MOF) relaxes rules for state-owned venture capital funds.
August 18 37) CSRC investigates HOMS and Hithink Royal flush for illegal lending to
finance retail stock purchases (margin financing).
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 August 21
38) CSRC suspends approval of 191 mutual funds and seeks to encourage more risk-
tolerant investors.
August 23
39) State Council issues new pension fund investment guidelines, allowing stock
investment at 30% of net assets.
August 25
40) Chinese central bank PBOC cuts interest rates by 0.25%.
September 7
41) Ministry of Finance (MOF) said it would remove personal income tax on dividends
for shareholders who hold stocks for more than a year.
October 24
42) Chinese central bank PBOC cuts interest rates by 0.25%.

Despite the myriad of measures mentioned above that were taken by China’s
policymakers in their attempt to “rescue” the market, the authorities have failed to prop up
the stock market prices. By the end of August, it appears that the government has abandoned
initial plans to boost stocks up to their self-proclaimed mandate level of 4500 points. While it
may be still too early to give an “F” grade to the Chinese government’s performance in this
case study of public crisis management, suffice to say that up to now they have not
effectively managed to solve the problem. Most of those measures mentioned above have not
really worked. Some of these policies such as the interest rate cuts, loosening rules on
pension fund investing, and banning short selling look more like the result of hastily formed
(out of panic) rather than carefully thought out policies. There’s only one thing that seems to
have a real effect: the direct stock purchases through the government’s so-called “national
team”.
The “national team” is the collective name given to state-backed and state-directed
Chinese financial firms who have been ordered to directly buy stocks in an attempt to boost
investor confidence. As the name suggests, these firms work in tandem to push share prices
higher. So far the “national team” has not been successful in pushing share prices higher to
the targeted level of 4500 points, but at least it has been widely credited for helping to
prevent even greater market losses. The working of the “national team” is evident in many
intraday transaction activities: when the market starts to decline “abnormally” showing a
sign of wild selloff, there will be mysterious surge of large volume purchases hinting that the
“national team” is entering the market. This “national team” staged rally typically occurred
in the last hour of trading before the markets close. Just how much money has the “national
team” put towards stocks over the past three months? According to Goldman Sachs analysts,
it’s a near-unbelievable 1.5 trillion yuan, or $US236 billion. Given that the market
capitalization of Amazon is around $US236 billion, this means that China has spent the
entire Amazon market capitalization to prop up its stock market, an extremely expensive
policy-making on the part of the Chinese government.

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 Cost-effectiveness issue of policy-making aside, the market rescue actions also have
profound implications. Above all, the incessant meddling in the nation’s stock market, which
borders on outright market manipulation, is an irony of trying to save the market but ending
up with harming (if not killing) the market. The authorities used several draconian tactics
such as banning some investors from selling, investigating those who still choose to sell and
arresting those who have sold shares “maliciously”, and even detaining and forcing the
journalist to apologize on state television for reporting (“spreading the rumor”) that CSRC
was preparing an exit plan from outright share purchases. These tactics may prevent market
melt-down in the short term, but will chill the market in the long term, and also have the side
effect of moral hazard and market distortion. Some bold scholars inside China also criticize
government’s handling of this matter. For example, Yongding Yu, the Director of the Institute
of World Economics and Politics at the Chinese Academy of Social Sciences, said “The
current stock market unrest does not constitute a systematic crisis, and so the government
should not intervene. What is happening to China’s stock market now is not panic selling but
a re-evaluation of the prices. It is inevitable that there is some overshooting in this process,
but the government should not take the place of the market and put prices on stocks” (The
New York Times, Sept. 14, 2015).

While the Chinese government initially appeared reluctant to intervene in the financial
turmoil, Beijing ultimately responded to the stock collapse with a set of exceptional
measures, intervening in the operations of the country’s stock exchanges. The government's
measures included compulsory orders that brokers buy shares, as well as a prohibition that
shareholders (in particular SOEs - state owned enterprises) sell. Other measures included a
suspension of initial public offerings and a further relaxation of the rules governing insurance
companies’ stock purchases. The Chinese Central Bank also pledged to lend 260 billion
renminbi (about EUR 36 billion) to major brokerage firms via the China Securities
Corporation, thereby avoiding a scenario in which the firms ran out of liquidity. In addition
to all these initiatives, most of the companies listed on the two Chinese stock exchanges were
either suspended or put under strict control by the Chinese financial authorities

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 Shanghai Stock Exchange suspensions (June-July 2015)

China’s stock regulator also introduced the ‘Announcement 18’, threatening ‘severe
punishment’ for any senior manager or major shareholder (one holding a stake of 5 % or
more) selling shares of a listed company during a period of six months. With a single
announcement, trillions of RMB in assets belonging to some of China’s wealthiest investors
were frozen for half a year. The securities regulator announced that there were no plans for
how and when major shareholders could resume selling their shares, stating instead that the
rules for future selling would be outlined in ‘further decrees’. It is still unclear when the
Chinese government will scrap these exceptional measures. Some have already been lifted,
but most exceptional measures remain in place at the time of writing. In the medium and
long term, they may well disappoint major Chinese and foreign shareholders and reduce the
liquidity available to finance private sector investments. If the measures are not rapidly
terminated, they may also effectively delay urgent structural reforms and jeopardise growth
over the long term. Another government intervention has involved China’s currency. On 11
August 2015, the People’s Bank of China (PBOC) announced its decision to liberalise the
RMB reference rate, traditionally set by the central bank. The move triggered an immediate,
significant depreciation of the Chinese currency, suggesting Beijing’s intention was to
depress the currency to boost exports and support the domestic economy. This move did not,
however, please international markets, which perceived the decision as a sign of weakness.

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 Exchange rate USD/CNY 2010- 2015

In the end, 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". Forbes journalist
argues that the "stock market crash does not indicate a blowout of the Chinese physical
economy." China is shifting from a focus on manufacturing to service industries and while it
has slowed down, it is still growing by 5%. After this last turbulence, as of January 2017 the
Shanghai Composite Index has been stable around 3,000 points, 50% less than before the
bubble popped.

2.2. Chapter 2: The turbulence impacts on global economy

2.2.1. Overview of the global economy from 2015 to 2016
 The world economy stumbled in 2015
The world gross product is projected to grow by a mere 2.4 per cent in 2015, a
significant downward revision from the 2.8 per cent forecast in the World Economic
Situation and Prospects as of mid-2015. More than seven years after the global financial
crisis, policymakers around the world still face enormous challenges in stimulating
investment and reviving global growth. The world economy has been held back by several
major headwinds: persistent macroeconomic uncertainties and volatility; low commodity
prices and declining trade flows; rising volatility in exchange rates and capital flows;
stagnant investment and diminishing productivity growth; and a continued disconnect
between finance and real sector activities. A modest improvement is expected to start next
year, with global growth reaching 2.9 per cent and 3.2 per cent in 2016 and 2017,
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respectively. The anticipated timing and pace of normalization of the United States monetary
policy stance is expected to reduce some policy uncertainties, while preventing excessive
volatility in exchange rates and asset prices. While the normalization will eventually lead to
higher borrowing costs, rising interest rates should encourage firms to increase investments
in the short run. The improvement in global growth is also predicated on easing of downward
pressures on commodity prices, which should encourage new investments and lift growth,
particularly in commodity-dependent economies.
 The developed economies are expected to contribute more to global growth
Growth in developed economies is expected to continue gaining momentum in 2016,
surpassing 2 per cent for the first time since 2010. In developing and transition economies,
growth slowed in 2015 to its weakest pace since the global financial crisis amid sharply lower
commodity prices, large capital outflows and increased financial market volatility. Growth is
projected to reach 4.3 per cent in 2016 and 4.8 per cent in 2017, up from an estimated 3.8 per
cent in 2015. Despite the slowdown in China, East and South Asia will remain the world’s
fastest-growing regions, with many of the region’s commodity-importing economies
benefiting from low prices for oil, metals and food. GDP growth in the least developed
countries is expected to rebound from 4.5 per cent in 2015 to 5.6 per cent growth in 2016, but
will fall short of the Sustainable Development Goal target of at least 7 per cent GDP growth
per annum in the near term. While developing countries have been the locomotive of global
growth since the financial crisis, the developed economies, particularly the United States of
America, are expected to contribute more to global growth during the forecast period.

 Low inflation persists in developed economies, while volatility of inflation and

growth remains high
Amid persistent output gaps, declining commodity prices and weak aggregate demand,
global inflation is at its lowest level since 2009. In developed-market economies, annual
inflation in 2015 is expected to average just 0.3 per cent. Ultra-loose monetary conditions
have so far prevented deflation from becoming entrenched in the developed countries.
However, low inflation has been associated with higher levels of volatility in inflation,
growth, investment and consumption in a majority of large developed and developing
countries and economies in transition. Significant currency depreciations have offset the
disinflationary pressures in several developing economies. The Brazilian real and the
Russian rouble have recorded large depreciations, and both countries remain mired in severe
economic downturns, accompanied by elevated inflation.

 The economic slowdown hurts labor markets

Unemployment is on the rise in many developing and transition economies, especially
in South America, while it remains stubbornly high in countries such as South Africa. At the
same time, labor force participation rates, especially among women and youth, have been
declining, and job insecurity has become more widespread, amid a shift from salaried work
to self-employment. The declining employment intensity of growth in many countries,

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coupled with stagnant real wages, poses a challenge to promoting inclusive and sustainable
economic growth, employment and decent work for all.

 Investment experienced sharp and broad-based deceleration

Growth rates of fixed capital formation have registered sharp declines in a majority of
developed and developing economies since 2014, including negative investment growth in
nine economies. The weak aggregate demand, falling commodity prices and persistent policy
uncertainties constrained investment growth during 2014-2015. A modest pickup in
investment is expected, provided commodity prices do not slide down further and the
anticipated normalization of the United States monetary stance reduces policy uncertainties.
However, coordinated efforts are still needed at national and international levels to ensure
that financial sectors effectively intermediate savings and liquidity and also stimulate fixed
investments.

 Reducing poverty and emission levels will require concerted policy efforts
The broad slowdown in economic growth in many developing economies and
generally weak wage growth will restrain progress in poverty reduction in the near term.
Further progress in poverty reduction will rely heavily on policies to reduce inequality, such
as investment in education, health and infrastructure, and stronger social safety nets. Global
energy-related carbon emissions experienced no growth in 2014 for the first time in 20 years,
with the exception of 2009 when the global economy contracted, suggesting that a delinking
of economic growth and carbon emission growth is possible with appropriate policies and
adequate investment. Low-carbon energy sources now account for over 50 per cent of new
energy consumption worldwide.

 The commodity price decline has had significant adverse effects on trade flows
and public finance
The terms-of-trade of commodity exporters have deteriorated significantly, limiting
their ability to demand goods and services from the rest of the world. Current-account
balances of commodity exporters have deteriorated, and given the net outflow of capital from
many commodity-dependent economies, countries have been forced to either draw down
international reserves or cut back imports. This has had second order effects on trade in non-
commodity-exporting economies, compounding longer-term trends, such as the slower
expansion of global value chains and limited progress in multilateral trade negotiations,
which weigh on the volume of global trade. The commodity price declines and exchange-rate
realignments have also had a significant impact on fiscal balances, particularly in the
commodity-dependent developing and transition economies. The sharp decline in the
headline value of global trade, however, is largely attributable to the deterioration of
commodity prices and appreciation of the dollar. Trade volumes have recorded a more
moderate deceleration, reflecting a widening divergence between the value and volume of
global trade.
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 Financial market volatility has increased significantly
The steady decline in global commodity prices, including a dramatic drop in the oil
price, reflects a combination of ample supply and slowing demand. Demand from China
plays a key role in price swings for metals, in particular, as the country accounts for almost
half of global metal consumption. The combination of commodity price adjustments and
capital outflows has been associated with sharp exchange-rate realignments and heightened
volatility in foreign-exchange markets.

 Strengthening the multilateral trading system will allow countries to better exploit
the benefits of trade
International trade is an important determinant of global growth and development. At
the global level, there remains considerable untapped potential to exploit the benefits of
international trade. A universal, non-discriminatory multilateral trading system is a central
element for harvesting this potential. However, the Doha Round has made limited progress in
the last fifteen years. At the same time, there has been an increasing prevalence of new-
generation regional trade agreements (RTAs). Mega-RTAs can diminish incentives for
universal negotiations, and may have adverse effects on countries not included in the RTA,
especially developing countries. The Trans-Pacific Partnership (TPP) is the first mega-RTA
completed, and creates a market of 800 million people with over 40 per cent of the world
gross product. Non-TPP members, however, may be impacted by diversion of trade and
investment towards TPP member countries. This highlights the importance of enhancing
coherence between RTAs and the multilateral trading system so they can support and sustain
an enabling development environment.

2.2.2. Lesson for Vietnam

 Impact on Vietnam

The international context fluctuates with the decline of the Chinese stock market and
some stock markets around the world, combined with measures to adjust the VND/USD
exchange rate in the country (after China devalued the yuan continuously). has a strong
impact on Vietnam stock market. The VN-Index has plummeted with a decrease of 15% in
August after rising 13.8% in the first 7 months of 2015. After falling 29.37 points (5.28%) in
the day session. August 24 (the strongest decline since May 8, 2014 - the time of the Rig 981
event), the VN-Index closed at 526.93 points, down 17% from the peak of The first 8 months
of 2015 (reached on July 14) and decreased by 3.4% compared to the end of 2014. The Hnx-
Index also dropped by 14% in August after rising 2.6% in the first 7 months. in 2015 and
closed at 73, 09 points on August 24, 2015 (down 18% from the peak of the first 8 months of
2015 set on July 6, 2015). Liquidity on the stock market in August decreased compared to
July, but tended to increase when the VN-Index and HNX-Index declined, indicating a
strong demand for low prices. On average, there are 149 million shares on the HSX and

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HNX on the two exchanges, down nearly 20% compared to July. Market capitalization (Ho
Chi Minh Stock Exchange (HSX) and Hanoi Stock Exchange (HNX) fell to VND 1.15
million (as of August 24, 2015, estimated to reach 31% of GDP in 2014), down nearly 10%
from July.

The main reason leads to decline including developments in the domestic and
international monetary market. Specifically: (i) Firstly, China devalued the domestic
currency, leading some countries (including Vietnam) to adjust the exchange rate, which
affected production enterprises and investors. The unfavorable domestic and international
stock market situation also increased the ability of foreign investors to withdraw capital; (ii)
Secondly, oil and gas stocks were heavily affected by the world oil price dropped the most
since 2009; (iii) Thirdly, banking stocks also fell sharply after negative information about
Import-Export Commercial Joint Stock Bank (Eximbank) and East Asia Commercial Joint
Stock Bank.

Positive factors such as lower gasoline prices or the issuance of Circular 123/2015 /
TT-BTC guiding the ownership of foreign investors in listed companies is not enough to
support the market. However, the general assessment shows that fluctuations in the stock
market in Vietnam in the recent time mainly stem from internal factors of the economy and
psychological factors, rather than the direct impact from fluctuations. of the Chinese stock
market.

From an indirect perspective, the impact from the fluctuations of the Chinese stock
market in Vietnam can be seen in the following aspects:

Firstly, the volatility of the Chinese stock market may lead to a shift in the portfolios
of Chinese investors and international investors on the Chinese stock market. Accordingly, a
part of the investment capital flow in the Chinese stock market may shift to other stock
markets, including Vietnam, in search of a safer alternative market and a relatively good
growth potential. Research on foreign investment data on Vietnam stock market in the first 7
months of 2015 showed that foreign investors tend to be net buyers on Vietnam stock market
(HSX and HNX) with a total value of VND 5,544 billion, of which, May and June had the
highest net buying volume with the value of VND 1,394 billion and VND 1,532 billion
respectively.

Secondly, China's total demand declined due to the loss of assets on the Chinese stock
market may affect Vietnam-China trade (reducing Vietnam's exports to China while
increasing imports from China). In terms of aggregate demand, China is now a country with
great consumption, thanks to its large population and high income in recent years. The asset
value of investors holding Chinese stocks decline (over 30%) will affect the aggregate
demand of this country, so the demand for Chinese imports from Vietnam may also decrease.
The key export sectors of Vietnam to China such as agriculture, seafood, minerals and other
materials will be affected sectors. In addition, with aggregate demand weakening while
production capacity has been and continues to be surplus, On the one hand, China will seek
ways to protect the domestic market before imported goods, on the other hand will make
efforts to promote Chinese exports to other countries (including Vietnam) by many
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 measures. In the context of China's export competitiveness increased after consecutive
depreciation of the yuan, the decline in Chinese demand due to the loss of assets on the stock
market will be factors that can contribute to the increase. trade deficit from China and
Vietnam in 2015-2016.

Thus, the impacts from fluctuations in the Chinese stock market to Vietnam can be
seen both directly and indirectly, with positive and negative aspects. In order to exploit
opportunities and to minimize negative impacts from fluctuations in the Chinese stock
market to Vietnam, the following issues should be paid attention to: (i) Improve management
and supervision capacity to ensure ensuring safe and healthy development of the market,
protecting legitimate interests for investors; (ii) Strengthen supervision, inspection and
inspection of securities companies and fund management companies; (iii) Expanding the
market with many investors, increasing the participation of financial institutions and foreign
investors; (iii) Enhancing supply, diversifying products in the market in accordance with
investors' needs; (iv) Diversify Vietnam's export markets as well as Vietnam's import
markets to minimize negative impacts from China's aggregate demand decline; At the same
time, restricting the import of non-essential goods from the Chinese market to limit the
increase in trade deficit from China.

 Lesson for Vietnam

China's stock market collapsed is a valuable lesson for developing markets including
Vietnam. The Chinese government's policy of monetary easing is basically aimed at
supporting economic growth. However, the side effects leading to the excessive rise of the
stock market have gone beyond the control of the government. This indicates that any risk
can occur if there is a lack of coherence and synchronization in economic management.

In addition, the lesson also showed the importance of institutional and foreign
investors to the financial market in general and the stock market in particular. The collapse
of the stock market has a large part of the investment movement which is a chain of a large
number of individual and small investors with limited knowledge about economy and
finance.

On the positive side, the problems of the Chinese stock market are opportunities for
Vietnam's stock market when the capital withdrawn from China will shift to new markets.
Especially in the context of Vietnam has emerged and caused much attention in the eyes of
institutional and foreign investors. The macro economy is on a positive recovery, with more
and more "open" reforms and changes to the world, including policies to increase the
ownership rate of foreign investors in Vietnamese enterprises. Recent male.

III. Conclusion
The recent crisis plaguing Chinese stock markets has been dramatic, but has not – yet –
completely burst of the bubble of valuations that could directly affect the country’s ‘real’

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economy. The Chinese government has reacted quickly to the crisis, so far managing to avoid
a full-blown financial crisis. The exceptional measures Beijing has deployed – including
depreciation of the domestic currency in an attempt to boost declining export performance –
would hardly be available in a full-fledged market economy. These measures are obviously
limited in time and may be lifted relatively quickly if the situation in financial markets
improves and China does not abandon its efforts to gradually enter the global financial
system. Investors’ confidence in the growth and smooth operation of Chinese stock
exchanges has, however, been shattered by recent turbulence. This is especially true for a less
experienced group of private, middle-class savers who enthusiastically invested in the stock
market over the last year. The current situation is also unfortunate as it has created
expectations of further state intervention to support the economy. By freezing stocks and
assets, the markets may also drain much-needed liquidity from the real economy. Analysts do
not agree on the likely outcome of the crash. Economist Nouriel Roubini has argued that
‘there is only a moderate chance of the stock- market slump snowballing into a full-blown
financial crisis. However, this scenario is not excluded by other analysts, who consider ‘there
are reasons to believe that this[the financial crisis] could turn out to be a more fundamental
cooling of China than previously thought. In any case, the recent financial crisis has
overshadowed a certainty in the Chinese economy: a major slowdown. The engine that was
able to produce double-digit growth for decades seems to have been deactivated. Beijing’s
‘new normal’ strategy has not yet produced its intended effects, and new and deeper reforms
are needed to bring the Chinese economy back on track. The crisis may also call into
question the financial sustainability of key government projects, such as the Asia
Infrastructure Investment Bank, the ‘One Belt, One Road’ initiative and a domestic
infrastructure plan based on urban development . In addition, Beijing will now have to
respond to a fundamental question that it has avoided for years: will China become a well-
functioning market economy, or will state capitalism continue to drive the operations of the
world’s second largest economy?

IV. Reference

www.socialistparty.ie

https://www.un.org

Minxin Pei (2015), “China’s big, misguided stock market gamble”. Fortune July 6, 2015;

The Economist (2015), “China’s botched stockmarket rescue”, Jul 30, 2015;

The Economist (2015), “China’s stockmarket: A crazy casino”, May 26, 2015;

http://www.chfsdata.org

http://www.hnx.vn
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http://www.world-exchanges.org/member-exchanges

http://thomsonreuters.com/en.html

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