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Back You are here: Home Market Market Update Insight 6 Reasons Why China's Stock Markets are Volatile

6 Reasons Why China's Stock Markets are Volatile

China is now the world 2nd largest equity markets after US.  Shanghai composite, the benchmark index hit a seven year high in June 2015.  Thereafter, it exhibits volatility with often swing as much as 10% within a day.  Why are China's stock markets so volatile?

Here are the possible reasons stated by Financial Times:

  1. Large retail base | 80-90% of trading are retail punters.  To make it worst, many of them are new to investing.  In May 2015 alone, more than 14m trading accounts were opened. 
  2. Short-term Horizons | Even professional fund managers in China often act with very short-term horizons as most of them are measured on monthly or quarterly performance.
  3. Policy-Driven | One of the main characteristics of Chinese markets is being policy driven.  Majority of the indices component are state-owned enterprises.
  4. Margin Finance | Margin trading as a percentage of overall market capitalization reached a record earlier this year and it was far higher than anything seen in any other markets at any time in history.
  5. Initial Public Offerings (IPO) syndrome | New IPO in China remains tightly controlled by the authorities.  The state in effect sets the price of new share sales, virtually guaranteeing quick bumper returns for those able to buy in. Even on days when the Shanghai market has fallen sharply, IPOs have typically risen by the daily limit of 44 per cent.  The result is that investors pull cash from the market ahead of new listings, draining billions of dollars of liquidity for a number of days. That can torpedo the market, but then push it back up when the funds are unlocked again.
  6. Limited Hedging Options | Borrowing costs are high and the availability of stock to borrow is limited. The only real viable way of hedging exposure is through index futures, which is not helpful for those trading specific stocks or sectors such as tech and healthcare. Instead, traders simply have to buy or sell to lessen or increase their exposure, which can result in stampedes when sentiment switches.

The figure below illustrated the new share trading account with the total market capitalization of Shanghai stock market:

Reference:

  1. Financial Times, Josh Noble, 2015-07-02, "FT Explainer:  Why are China's Stock Markets so Volatile