What Drives China's 2015 Stock Market Surges and Turmoil?

• Date: 01 June 2019
• Author: Yang‐Chao Wang,Xiongwei Li,Jui‐Jung Tsai
• Published date: 01 June 2019
• DOI: http://doi.org/10.1111/ajfs.12261

What Drives China’s 2015 Stock Market

Surges and Turmoil?*

Yang-Chao Wang

Newhuadu Business School, Minjiang University, China

Jui-Jung Tsai**

Straits Institute, Minjiang University, China

Xiongwei Li

European and Chinese Business Management, University of Zurich, Switzerland

Received 22 January 2016; Accepted 1 December 2018

Abstract

Using high-frequency data, we investigate China’s stock market surges and turmoil from

2014 to 2015 by employing GARCH family models to evaluate the effects of government

policies, economic factors, and related announcements. The results indicate that China’s stock

market has primarily been driven by government policies rather than economic factors. Dur-

ing the period, the commentaries of the People’s Daily further amplified the direction of mar-

ket movements in the market surges and turmoil. In addition to individual policies and

announcements, we explore the structural changes in volatility in different market stages and

provide explanations for the distinct features of each stage.

Keywords Chinese stock market; GARCH; Policy and regulation; Returns; Volatility

JEL Classification: G00, G10, G18

1. Introduction

The Chinese stock market, the second largest stock market in the world, has

attracted global attention recently for its extreme surges and turmoil. The Shanghai

*The authors thank the editor, associate editor, and anonymous referees for their helpful and

insightful comments. This work was supported by the Hundred Talents Program for High-

Level Taiwanese Talents Introduction of Fujian Province, China, the Natural Science Founda-

tion of Fujian Province, China (Grant No. 2017J01800 and 2016J05174), the Special Founda-

tion of Higher Education of Fujian Province, China (Grant No. JK2015039), and Science and

Technology Foundation of Minjiang University (Grant No. MYK18045).

**Corresponding author: Associate Professor, Straits Institute, Minjiang University, Fuzhou

350108, China; Specially Invited Expert, Hundred Talents Program for High-Level Taiwanese

Talents Introduction, Fujian Province, China. Tel: +86-156-0602-7020, Fax: +86-591-8376-

1507, email: juijungtsai@foxmail.com.

Asia-Pacific Journal of Financial Studies (2019) 48, 410–436 doi:10.1111/ajfs.12261

410 ©2019 Korean Securities Association

Composite Index surged over 150% in a year. However, these surges did not

accompany a jump in the real economy or in corporate performance. In mid-2015,

the Shanghai Composite Index plunged nearly 30% and $3.9 trillion, an amount

over 15 times the size of Greece’s 2014 GDP, was erased from China’s stock market

within 4 weeks.

As an economic powerhouse, China’s growth has not come without challenges.

In 2014, China’s GDP grew by 7.3%, a far cry from the heydays when China’s GDP

was around 10% a year on a regular basis. Economic growth has slowed in a transi-

tion economy. In response, the Chinese Government has implemented many poli-

cies to shore up the economy. Further, financial reforms have been designed to

support the economy by smoothly liberalizing financial markets and helping the

direct finance of small and medium enterprises.

However, in 2015, even as China’s economy continued to slow, the stock market

was on an incredible mystery run. Market fever swept across China. Then, the tur-

moil arrived suddenly and most investors suffered heavy losses. Because the surges

of the stock market before the turmoil were not supported by economic fundamen-

tals, in-depth analyses are essential and urgent.

Prior studies suggest that China’s stock market is primarily driven by investor

speculation, institutional rent-seeking by state-owned enterprises, and state guaran-

tees in an environment of financial repression. First, the market is shaped by over-

speculation. It is not surprising that households determine risky asset ratios based

on their subjective expectations of the financial market, rather than their back-

ground factors such as wealth, age, and risk preference (Cai et al., 2013). Adding

fuel to the flame, investor sentiment in China has a tremendous impact on stock

returns (Chi et al., 2012) and investors tend to herd along with rising stock marke t

returns (Yang and Chen, 2015). This over-speculation creates high turnover ratios.

Second, China’s stock market is the only stock market in the world in which

the majority of listed companies are state-owned enterprises (SOEs). Government-

controlled firms have lower debt costs than privately-controlled firms, which may

partly explain why SOEs remain prevalent in China (Shailer and Wang, 2015).

However, two significant conflicts concern investors: tradable versus non-tradable

shares, and the Government’s interest versus private investors’ interests. Opper et al.

(2012) found evidence that state shareholders place greater emphasis on sales gener-

ation than on profitability when they monitor their CEOs. In addition, confusion

about property rights in Chinese SOEs remains. Even worse, the Government and

SOEs were most likely to make use of the external funds raised by listed comp anies

in the post-acquisition stage to support and subsidize other inefficient SOEs (Du

et al., 2012). Lu and Shi (2012) also found that the effects of corporate governance

reform in 2001 were significantly weaker for firms with greater state-owned shares.

Moreover, Gul et al. (2010) found that in China less firm-specific information will

be capitalized into stock prices if the largest shareholder is government related.

Third, the Chinese Government is well known for excessive intervention: Chi-

na’s stock market is a policy-oriented market. Policies have long-term effects on

China’s 2015 Stock Market Turmoil

©2019 Korean Securities Association 411