Volatility in China's Stock Market: Boom, Bust, Boom…And Bust?

17 Pages Posted: 30 May 2017

See all articles by Richard B. Evans

Richard B. Evans

University of Virginia - Darden School of Business

Junhui Qian

Shanghai Jiao Tong University

Dennis Yang

University of Virginia - Darden School of Business

Abstract

With the Shanghai Stock Exchange Composite Index (SCI) dropping 5% at its opening, a circuit breaker was triggered and halted trading for 15 minutes. But when trading resumed, the market continued to drop, and a second circuit breaker was triggered, halting trading for the day. The overall SCI decline of 7.2% for the day was not just disastrous for Chinese investors, but it also caused a global panic that perhaps a global recession would ensure. China's Chief Economist and Head of Greater China Economic Research for JPMorgan, had JPMorgan clients and investment professionals looking to him for advice on how to interpret the events in China. Would the decline continue? What impact would it have on global markets in general and the United States in particular?

Excerpt

UVA-F-1759

May 13, 2016

Volatility in China's Stock Market: Boom, Bust, Boom…and Bust?

From his office at the JPMorgan Private Bank headquarters in Hong Kong, Zhu Haibin could see the peaceful Victoria Harbour below. But the nature of the phone calls he was receiving that morning from both investors and other JPMorgan investment professionals was in stark contrast to that calm and peaceful view. With the Shanghai Stock Exchange Composite Index (SCI) dropping 5% at its opening, a trading mechanism called a circuit breaker, designed to pause trading when precipitous market changes occurred, was triggered, halting trading for 15 minutes. When trading resumed, however, the market continued to drop, and a second circuit breaker was triggered, halting trading for the day. The overall SCI decline of 7.2% for the day was not just disastrous for Chinese investors, but it also caused a global panic that perhaps a global recession would ensure. Many other markets, including the U.S. market, were off to one of their worst, if not their worst, start on record.

Zhu was China's Chief Economist and Head of Greater China Economic Research for JPMorgan, so JPMorgan clients and investment professionals were looking to him for advice on how to interpret the events in China. As he prepared for a conference call with these important constituents, he pondered the events of the past few years (Exhibit 1): the record returns of 2014 and early 2015, when the SCI more than doubled in value; the 40% decline in the summer of 2015; the modest rebound in the fall of 2015; and the dramatic events of early January 2016. Reviewing these events seemed like an important place to start to prepare for the questions from participants on the call: Would the decline continue? What impact would it have on global markets in general and the United States in particular?

The Boom

. . .

Keywords: bull market, bear market, circuit breaker, stock exchange trading

Suggested Citation

Evans, Richard B. and Qian, Junhui and Yang, Dennis, Volatility in China's Stock Market: Boom, Bust, Boom…And Bust?. Darden Case No. UVA-F-1759. Available at SSRN: https://ssrn.com/abstract=2974587

Richard B. Evans (Contact Author)

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-924-4030 (Phone)
434-243-7680 (Fax)

HOME PAGE: http://faculty.darden.virginia.edu/evansr/

Junhui Qian

Shanghai Jiao Tong University ( email )

1954 Huashan Rd
Shanghai, 200030
China

HOME PAGE: http://jhqian.org

Dennis Yang

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States

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