China Stock Market Case Study

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2016 Investment Strategy on China 's Stock Market I. Introduction China 's stock market is still an emerging market, not as mature as US stock market. So, there are several factors U.S. investors should consider when making investment in China. (1) Institutional investors are underdeveloped and individual investors account for a large proportion in China’s market. 80% of the trade volume in China’s stock market is from individual investors, while institutional investors account for 70% of the trading volume in the U.S. stock market. Most of individual investors tend to focus on short-term speculation. They like to buy small and medium-sized stocks. So three kinds of stocks are favored by individual investors in China – stocks …show more content…

PE ratio of the GEM reached up to 143 in June 2015, which was even higher than the PE ratio of NASDAQ in 2000 (PE ratio was 100 when the bubble burst at 5000 points). After a mad bull in China’s stock market in the beginning of 2015, bubble in the market became very big. With 8-month adjustment, PE ratio of Shanghai Composite Index CSI 300 is now 13.87, Shenzhen Composite Index 40.36, the weighted average PE ratio of these two market 28.3, and PE ratio of SME board is 51.51, and of the GEM is 81.7. However, there still remain some structural bubbles. The bust of the bubbles in the GEM board is not over yet. The crash of GEM board in China is similar to the crash of NASDAQ in US in 2000, shown in Figure 3. Figure 3: Comparison of the GEM and NASDAQ 5. Fundamental …show more content…

The U.S. stock market has experienced six years of bull markets. According to historical statistics, in the cycle of rising interest rates, there is an over 80% probability that U.S. stocks and external markets will turn to bear markets. The head of bear had already been formed in US stock market, and a declining trend had been shown in other stock markets. China has lowered interest rates and cut the requirement reserve ratio (RRR) several times, as shown in Figures 5 and 6. There may still be space for further lowering key interest rates and cutting the RRR. However, the marginal effect in stimulating the stock market is diminishing. Moreover, China is undergoing a budget deficit, which is the highest in 50 years. So, monetary and fiscal policies have limited effect now. The CPI is low and PPI is negative (see Figure 7). China’s monetary policy would maintain low interest rates. With the rate-increase cycle in US, RMB will continue to depreciate (see Figure 8). This will offset the liquidity brought by the central bank’s policies to lower key interest rates or cut the requirement reserve ratio. Figure 4: China 's GDP Growth

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