Practical analysis for investment professionals
04 June 2015

The Chinese Stock Market Plunge: What Was That About?

Last Thursday, the Chinese stock market did something unusual. It took a headlong dive.

In a matter of a few hours, the CSI 300 Index of Shanghai and Shenzhen’s largest listed companies tumbled 6.7% while the Shanghai Composite Index fell 6.5%,

This came after an especially bullish period for Chinese stocks. Up until last week’s plunge, the CSI 300 had risen about 47% for 2015 and, as Larry Cao, CFA, pointed out last week, about 128% since late May 2014.

All of which begs the question: what, exactly, is going on?

The pre-plunge performance of the Chinese stock market suggests that it was more or less uncoupled from the larger Chinese economy. The stock market’s rapid ascent had come amid slowing growth in China. Was last week’s dramatic drop a sign that the stock market’s performance was potentially realigning with that of the economy as a whole?

Commentators and analysts were quick to offer their theories, whether downplaying the decline as nothing to worry about or talking it up as, maybe, the beginning of the end of the Chinese bull market.

To help make sense of a rather opaque situation, we asked CFA Institute Financial NewsBrief readers what they made of the development.

Poll: How do you characterize the Chinese stock market’s plunge last week?

Poll: How do you characterize the Chinese stock market's plunge last week?

The consensus that emerged was hardly a revelation. Most did not feel they had enough information to make a judgment, with a strong majority (53%) of the 506 respondents registering an uncertain “Who knows?” Otherwise, 29% described the plunge as a necessary correction, while 4% characterized it as an anomaly that was best ignored given what they see as the market’s underlying strength. A mere 14% felt the plunge spelled the end of the bull market and the start of a downturn.

In the week since the dramatic decline, the Chinese government has stepped in, doing its best to assure investors that its markets are in good health and that its economic reforms and monetary easing policies — prime contributors to the bull market — would continue.

That has apparently worked, at least in the short term. In the past week, the CSI 300 has recouped much of its losses, suggesting that if last Thursday’s dramatic tumble was a necessary market correction, it was a short-lived one. Or, read another way, if there is a stock bubble, the Chinese government will do what it can to keep it inflated.

But the underlying message of our poll is clear. Judging by the opinions expressed by most of our respondents, there is a great deal of uncertainty about what is driving the behavior of the Chinese stock market.

Do you want to participate in future polls? Sign up for the CFA Institute Financial NewsBrief.

If you liked this post, don’t forget to subscribe to the Enterprising Investor.

All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

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About the Author(s)
Paul McCaffrey

Paul McCaffrey is the editor of Enterprising Investor at CFA Institute. Previously, he served as an editor at the H.W. Wilson Company. His writing has appeared in Financial Planning and DailyFinance, among other publications. He holds a BA in English from Vassar College and an MA in journalism from the City University of New York (CUNY) Graduate School of Journalism.

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