2015–2016 Chinese stock market turbulence causes and effects

The 2015-2016 Chinese stock market turbulence was a wild ride, to say the least. It was triggered by a combination of factors, including a decline in the country's economic growth rate, a surge in margin trading, and a lack of regulation.

The Chinese economy was growing at a rate of 7% in 2015, but this was down from 10% just a few years earlier. This decline in growth rate was a major concern for investors.

The Shanghai Composite Index plummeted by 43% between June and August 2015, wiping out trillions of dollars in investor wealth. This was the largest decline in the index's history.

Broaden your view: Chinese Stock Bubble of 2007

The Chinese stock market experienced a significant downturn in 2015, with the Shanghai Composite Index plummeting from over 5,000 points in mid-June to less than 3,000 in late August.

Investors faced margin calls on their stocks, leading to a sharp market correction. The sell-off was triggered by a surge in stock prices, fueled by retail investors who borrowed to buy equities.

A different take: Types of Investors in Stock Market

Prices increased more than 150 percent on the Shanghai exchange from June 2014 to June 2015, with the Shenzhen Stock Exchange and the Shenzhen ChiNext board experiencing even greater gains.

The market was priced way beyond perfection, with many investors finding themselves needing to sell their shares once prices fell. This led to a sharp market correction.

The global economy was also affected, with stocks in Europe and the United States experiencing a sell-off. The German stock index, the DAX, slumped to 9,979 points on January 7, 2016, falling below the psychologically important 10,000-point threshold.

The Dow Jones Industrial Average had fallen 2.2%, the S&P 2.1%, and the Nasdaq Composite 2.6% by 3:22 on January 4, 2016, in New York.

The Shanghai Composite Index dropped 6.9% on January 4, 2016, while the Vanguard FTSE Emerging Markets Exchange-Traded Fund lost 3.3%. US stocks such as Netflix fell by 6%, Alphabet 3.9%, and Facebook 3.9%.

The Brazilian real fell 2% against the dollar, and Brazilian equities dropped 1.6% to 42,646.19, its lowest since March 16, 2007.

The Chinese government took steps to stabilize the market, including cutting interest rates and reserve requirements for banks. However, the market continued to drop, with the Shanghai stock index plummeting 32% from its peak.

Readers also liked: Made 2 Million

Regulators halted new initial public offerings, and the China Securities Finance Corp. bought at least one trillion RMB worth of shares in an effort to stabilize the market.

The Chinese economy was already struggling, with the government cutting its benchmark lending rate to a record low in July 2015. Pension funds were also allowed to invest in the stock market, unlocking up to one billion RMB.

Here are some key dates in the market turbulence:

The Chinese government took swift action to stabilize the stock market, enacting measures such as limiting short selling under threat of arrest, and requiring large mutual funds and pension funds to buy more stocks.

Regulators also imposed a six-month ban on stockholders owning more than 5 percent of a company's stock from selling those stocks, resulting in a 6 percent rise in stock markets.

The government provided cash to brokers to buy shares, backed by central-bank cash, and suspended initial public offerings to curb the market's volatility.

Recommended read: China B Shares

Over 1,300 firms, representing 45 percent of the stock market, suspended trading of stocks starting on 8 July.

The government's efforts were not without controversy, as 197 people, including a journalist and stock market officials, were arrested for spreading rumors about the market crash.

The government officials accused "foreign forces" of intentionally unsettling the market and planned a crackdown on them.

Billionaire hedge fund manager Xu Xiang was arrested for allegedly manipulating the stock market during the 2015 Chinese stock market turbulence.

By November 2014, China's renminbi (RMB) became one of the world's top five payment currencies, overtaking the Canadian dollar and the Australian dollar.

The RMB's growing popularity was a significant development, as it made China's exports more competitive in foreign markets and made foreign companies seem more expensive.

In August 2015, the People's Bank of China devalued the RMB by 1.86 percent to CN¥6.2298 per US dollar, making China's exports even more competitive.

Intriguing read: E-commerce in China

The RMB's value continued to fluctuate, with the central bank devaluing it again to CN¥6.3975 per US dollar on August 14, 2015.

By mid-January 2016, an article in The Economist argued that the strains on the yuan indicated a problem with China's politics.

However, a spokesperson for the International Energy Agency (IEA) argued that the risk was "overplayed".

China launched a new clearing system, Cross-Border Inter-Bank Payments System (CIPS), in October 2015 to settle cross-border RMB transactions and increase global usage of the Chinese currency.

CIPS was intended to cut transaction costs and processing times, and remove one of the biggest hurdles to internationalizing the yuan.

By December 2015, the RMB was still the fifth most used global payments currency and the second most used currency for trade finance.

In December 2015, China was the world's largest exporter, with 27 percent of China's goods invoiced in RMB compared to 19 percent in 2014.

The IMF's decision to add the RMB to the SDR, made in 2016, was crucial to global financial stability, as it encouraged China to continue to be a responsible global citizen and liberalize its exchange rate.

Suggestion: History of the English Fiscal System

The Chinese government took swift action to stabilize the stock market in 2015. They limited short selling under threat of arrest, a move that helped to curb speculation.

Large mutual funds and pension funds pledged to buy more stocks, injecting much-needed liquidity into the market. This move was part of a broader effort to shore up the market and prevent a complete collapse.

The government also stopped initial public offerings (IPOs) and provided cash to brokers to buy shares. This helped to prop up the market and prevent a further decline.

To further stabilize the market, the government imposed a six-month ban on stockholders owning more than 5% of a company's stock from selling those stocks. This move helped to reduce selling pressure and stabilize the market.

The government's measures seemed to have an initial impact, with the stock market rising by 6% as a result of the ban. However, the long-term effects of the government's intervention were less clear, with some arguing that it may have created a moral hazard and led to the development of an even larger bubble.

For your interest: Index Funds Are Ruining the Stock Market

Here is a summary of the government's measures:

These measures were taken to stabilize the market and prevent a complete collapse.

The global impact of the Chinese stock market turbulence was significant. The sell-off on the Chinese stock market set off a global rout, with stocks in Europe and the United States getting hit.

Many stocks around the world were down 2-3%. The German stock index, the DAX, fell below the psychologically important 10,000-point threshold, dropping 2.29% from January 6.

The Dow Jones Industrial Average had fallen 2.2% by 3:22 Monday on January 4 in New York, while the S&P 500 was down 2.1%. The Nasdaq Composite fell 2.6%.

The Shanghai Composite Index fell 6.9%, and the Vanguard FTSE Emerging Markets Exchange-Traded Fund lost 3.3%. US stocks like Netflix, Alphabet, and Facebook also took a hit, falling by 6%, 3.9%, and 3.9% respectively.

The Brazilian real fell 2% against the dollar, and Brazilian equities dropped 1.6% to 42,646.19, its lowest since March 16, 2007.

Related reading: SSE Composite Index

The Chinese stock market experienced a sharp sell-off on both 4 January and 7 January 2016, with stocks tumbling globally.

The first day of trading in the Chinese stock exchange saw the market fall by 5% before regulators halted trading. It was reopened for another 15 minutes, and stocks continued to fall until trading was halted again.

On 7 January 2016, the Chinese authorities suspended the circuit breaker out of concern that it may have intensified investors' concerns.

The Shanghai stock index lost 32% from its peak on 8 July 2015, with the Shanghai Composite Index peaking at 5,166 points.

The People's Bank of China (PBOC) cut its benchmark lending rate to a record low and reduced reserve requirements for some banks on 8 July 2015.

Pension funds managed by local governments were allowed to invest in the stock market, unlocking up to 1 billion RMB to invest in the equity market on 8 July 2015.

Suggestion: Stocks Futures Markets Fall

The Shanghai and Shenzhen stock exchanges announced plans to lower securities transaction fees by 30% on 8 July 2015.

The Chinese Securities Regulatory Commission (CSRC) lowered the threshold for margin financing for individual investors on 8 July 2015.

China's top 21 securities brokerages pledged to invest at least 120 billion RMB, or 15% of their net assets, to stabilize markets on 8 July 2015.

Regulators halted new initial public offerings in an effort to shore up liquidity on 8 July 2015.

The China Securities Finance Corp (CSF) bought at least 1 trillion RMB worth of shares in an effort to stabilize markets over the course of a few days.

The Shanghai stock index plummeted 32% from its peak on 8 July 2015.

The Ministry of Public Security said it would help the CSRC investigate short selling of stocks and indexes on 8 July 2015.

China carried out the biggest devaluation of the renminbi in two decades to boost its slowing economy on 11 August 2015.

The CSRC announced that it would allow the market to play a bigger role in determining stock prices on 11 August 2015.

Readers also liked: Hang Seng China 50 Index

Shanghai's main share index lost 8.49% of its value on 11 August 2015, dubbed 'Black Monday' by Xinhua.

The PBOC cut interest rates and reserve requirement ratio for the second time on 11 August 2015.

Wang Xiaolu, a Caijing journalist, was detained by police on 11 August 2015 for publishing an article claiming the CSRC planned to withdraw funds from the stock market.

The search term 'stock market collapse' was censored on Baidu on 11 August 2015.

Wang Xiaolu confessed on state television to making 'irresponsible' and 'sensational' remarks in his writing about the stock market on 11 August 2015.

Readers also liked: Economic Effects of the September 11 Attacks

The Chinese stock market turbulence of 2015-2016 was a significant event that had far-reaching consequences for the global economy.

China's factory activity continued to decline in December 2015, with overseas demand for goods falling and export orders for Chinese manufacturers declining.

The US also experienced a decline in manufacturing activity in December 2015, with a PMI of 48.2, the lowest since the end of the recession in 2009.

A different take: December Stock Market History

In October 2015, Caixin China General Services PMI reported that Chinese business activity had declined at its quickest rate since 2009.

The strong US dollar, a weak global economy, low oil prices, and excessive inventories were blamed for the slower manufacturing activity in the US.

In contrast, China's real economy seemed to be doing okay, with the easing of monetary policy pushing asset prices up and a massive take-up of new space from Internet companies in cities like Beijing and Shanghai.

However, the stock market was trading at a huge discount, with investors not getting the same message as those operating in the real economy.

The turmoil in China's stock market had the potential to be a much bigger threat to the global economy than the debt crisis in Greece.

Here's a comparison of the two crises:

The risk of a "hard landing" for China's economy was a concern for economists, even if the stock market had limited impact on the real economy.

About 1,300 companies have suspended their shares in an attempt to sit out the market rout, which is roughly half of the market. This move is seen as a way for companies to lock in the value of their stock, which they've used as collateral for loans.

Companies that have suspended trading are trying to protect their own interests, particularly those that have used their stock as collateral for loans. This is a common practice, but it can have unintended consequences.

The suspension of trading has had a significant impact on the market, with many companies choosing to sit out the rout rather than risk further losses.

About 1,300 companies have suspended their shares, which is almost half the market, in an attempt to sit out the rout. This is a significant move by companies to avoid further losses.

Some companies have suspended trading because they have used their own stock as collateral for loans. This is to "lock in the value for the collateral", as explained by Christopher Balding, a professor of economics at Peking University.

In the year leading up to the turbulence, individual investors in China borrowed money to buy stocks, often exceeding the rate of economic growth and profits of the companies they were investing in.

Retail investors in China borrowed to buy equities, fueling an unusually large part of the stock market run-up.

The Shanghai Composite Index plummeted from over 5,000 points in mid-June to less than 3,000 in late August.

There has been an explosion in so-called margin lending, where brokers can demand more cash or collateral if the price of securities has fallen – known as a margin call.

Shares can go down as well as up, making it difficult for China's 90 million retail investors to afford their investments.

The Shanghai stock index plummeted 32% from its peak on July 8, 2015, after a series of events led to a market downturn.

China's central bank, the People's Bank of China (PBOC), cut its benchmark lending rate to a record low and reduced reserve requirements for some banks in the days leading up to the crash.

The Shanghai Composite Index peaked at 5,166 points before dropping 8.5% in a single day.

Regulators took steps to stabilize the market, including lowering securities transaction fees by 30% and setting up a team to investigate price manipulation.

However, the market continued to decline, with the Shanghai stock index dropping another 8.49% on August 10, 2015, dubbed "Black Monday".

The PBOC cut interest rates and reserve requirements for the second time, but it wasn't enough to stop the market's downward spiral.

You might like: Shanghai Stock Exchange STAR Market

The turmoil in China is a much bigger threat to the global economy than the debt crisis in Greece. Economists say the Chinese economy was already slowing, and the stock market sell-off makes the volatility in European and US indices seem like a walk in the park.

Kathleen Brooks, research director at Forex.com, notes that even if the stock market has limited impact on the real economy in China, there's still a risk of a "hard landing."

The Shanghai stock index lost thirty-two percent from its peak on July 8, 2015, after peaking at 5,166 points.

China's central bank, the People's Bank of China (PBOC), cut its benchmark lending rate to a record low and reduced reserve requirements for some banks in an effort to stabilize the market.

Pension funds managed by local governments were allowed to invest in the stock market, unlocking up to one billion RMB to invest in the equity market.

The Shanghai and Shenzhen stock exchanges announced plans to lower securities transaction fees by thirty percent, but stocks continued to drop, with the Shanghai Composite Index dropping 8.5 percent in a day.

The Chinese Securities Regulatory Commission (CSRC) lowered the threshold for margin financing for individual investors, and regulators halted new initial public offerings in an effort to shore up liquidity.

Over the course of a few days, the China Securities Finance Corp (CSF) bought at least one trillion RMB worth of shares in an effort to stabilize markets, but the Shanghai stock index still plummeted thirty-two percent from its peak.

The Ministry of Public Security said it would help the CSRC investigate short selling of stocks and indexes, and Caijing journalist Wang Xiaolu published an article claiming the CSRC plans to withdraw funds from the stock market.

On August 11, 2015, China carried out the biggest devaluation of the renminbi in two decades to boost its slowing economy.

The CSRC announced that it would allow the market to play a bigger role in determining stock prices, signaling that the government might reduce its role in propping up the markets.

The Shanghai's main share index lost 8.49 percent of its value on August 10, 2015, dubbed 'Black Monday' by Xinhua.