China's Stock Market: Understanding its Boom-and-Bust Cycles

40 Pages Posted: 21 Oct 2021 Last revised: 10 Nov 2021

See all articles by Richard B. Evans

Richard B. Evans

University of Virginia - Darden School of Business

Dennis Yang

University of Virginia - Darden School of Business

Junhui Qian

Shanghai Jiao Tong University

Yangmei Deng

Independent

Abstract

This case explores the historical development and current state of financial markets in China, using the context of a private bank chief economist preparing for a client call. The case is set on July 7, 2020, as the Shanghai Stock Exchange Composite Index reached a 29-month high. This new high was the result of the Chinese government's efforts to stabilize financial markets after COVID-19 hit, as well as to calm concerns about capital flight because of new security legislation in Hong Kong. Students take on the role of J.P. Morgan's Hong Kong–based chief economist, Hai Bin Zhu, in preparing to present his outlook on the prospects for investment in China overall and relative to other potential investment geographies, such as the United States and financial markets around the globe. The case covers the development of China's financial system over the past four decades, focusing on the banking system, equity and debt markets, and the structure of household assets. Special emphasis is placed on the most recent boom and bust cycles of Chinese equities to help students understand the factors suggesting additional equity growth (the case for a “bull” market) and retraction (the case for a “bear” market). Additionally, the government responses to these most recent bull and bear market cycles are described, helping students develop intuition about how the government might react to future events. This preparation will enable students to answer questions that participants on the call would likely ask: How would COVID-19 affect the investment opportunities in China, and how did China's markets compare to markets in the United States and the rest of the world? Most importantly, was this the time for American investors to invest in China?

Excerpt

UVA-F-1985

Jul. 29, 2021

China's Stock Market:

Understanding Its Boom-and-Bust Cycles

On July 7, 2020, the Shanghai Stock Exchange Composite Index (SCI) reached a 29-month high. It jumped by 6%, capping a 16.5% rise over the previous eight straight trading sessions. This followed the Chinese government's efforts to stabilize financial markets after COVID-19 hit, as well as to calm concerns about capital flight because of new security legislation in Hong Kong.

From his office at the J.P. Morgan Private Bank headquarters in Hong Kong, Hai Bin Zhu considered these developments and the strong recent performance of the Chinese stock market. In particular, he wondered what investment advice he should give to investment professionals and clients of J.P. Morgan on a Zoom call that was to take place that morning. As the Chief China Economist and Head of Greater China Economic Research, Hai Bin had a responsibility to interpret these important events. As he prepared for the call, he pondered the events of the past 12 years (Exhibit1A): the record returns of 2008 and 2015, the more stable growth of 2018 and 2019, and the most recent COVID-19-related decline and subsequent spike in 2020. Reviewing these events seemed like an important place to start to prepare for the questions that participants on the call would likely ask: How would COVID-19 affect the investment opportunities in China, and how did China's markets compare to markets in the United States and the rest of the world? Most importantly, was this the time for American investors to invest in China?

. . .

Keywords: China, equities, Shanghai Stock Exchange, China's banking system, financial assets, household wealth, investment channels, monetary policy, ownership reforms, financial regulation, leverage, speculative bubble, Shiller, international finance

Suggested Citation

Evans, Richard B. and Yang, Dennis and Qian, Junhui and Deng, Yangmei, China's Stock Market: Understanding its Boom-and-Bust Cycles. Darden Case No. UVA-F-1985, Available at SSRN: https://ssrn.com/abstract=3942610

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/

Dennis Yang

University of Virginia - Darden School of Business ( email )

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

Junhui Qian

Shanghai Jiao Tong University ( email )

1954 Huashan Rd
Shanghai, 200030
China

HOME PAGE: http://jhqian.org

Yangmei Deng

Independent

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