Working Papers - details - WEF0040
WEF0040
2008 Stock Markets and the Race to the Bottom: “Stuck” in China
Tyler Rooker
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Abstract
Since late 2005, China’s two stock markets, in Shanghai (SSE) and Shenzhen (SZSE), have risen
over 600% only to fall by close to 60% from a peak in late 2007. The race up and down is
reflected in China’s macroeconomic indicators, but the real story lies with individuals investing
in the market. In contrast to past studies of China’s stock markets, this paper argues that
individual investors, and especially those investing less than 100,000 USD, are a critical part of
the market. One postulate is that it is precisely these “micro” investors who, despite the
general consensus that China’s stock markets are “policy markets”, keep the state from
regulating the market. Put warrants, literally worthless paper in the days before the end of
trading, continue to become sites for speculative trading. The 2007 stock market rose 97%,
while the 2008 market has fallen over 50%: the non-tradable share reform, allowing large and
small holders to trade previously non-tradable shares, is the current bane of the market. Yet the
culprits in abnormal trading are not “individuals”, but the companies, often owned by local
governments, that are the vanguard of China’s reform. This paper reviews these developments
in detail, and suggests a potential new theory of China’s securities reform.