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Business Schools Comment On Chinese Stock Market Rout

B-Schools quick to voice opinion on China’s stock market slide. Both major indices drop more than a third — wiping $3 trillion off their value.

Thu Jul 9 2015

Business schools have been quick to comment on China’s stock market rout. Chinese stocks have sunk, with both major indices dropping more than a third after hitting a seven year high in mid-June — wiping $3 trillion off their value.

“This is a typical bubble — eventually we were going to burst it, but I did not predict it to fall at that speed,” said Professor Oliver Rui at Shanghai’s China Europe International Business School (CEIBS), on CNN TV.

Linda Yueh, adjunct professor of economics at London Business School, highlighted the threat to the Chinese economy. There are signs that China’s 7% growth in recent years is slowing down.

“A serious knock to confidence while the economy is structurally slowing down is worrying,” Linda said.

The stock crash has pushed Chinese authorities to take drastic action. Authorities this week banned listed company shareholders with stakes of 5% or more from selling any shares for six months.

That followed another round of share suspensions that have curbed trading in nearly 1,500 stocks — about 50% of companies listed on China’s two main exchanges — locking in $2.6 trillion, according to Bloomberg data.

The China Securities Finance Corporation is also pumping liquidity into the market to help prop up sinking stocks. It has provided nearly $42 billion of credit to brokerages to help them purchase shares.

“The government in Beijing has compelled a variety of companies to bolster the markets, from insurers to brokerage firms, as well as promising to provide liquidity itself,” said Daniel Altman, adjunct professor at NYU Stern School of Business.

Steve Tsang, chair of the School of Contemporary Chinese Studies at University of Nottingham, said the Chinese government is in “crisis management”.

“People can see that, and will respond accordingly,” he said. “If the government should prove unsuccessful, the ramifications would be wider and much more serious.”

Lei Mao, professor at Warwick Business School, said recent events had likely put government bodies under pressure. “Surely the recent events will dampen the credibility of the Xi-Li government,” he added.

Ou-yang Hui, professor of finance at Cheung Kong Graduate School of Business in Beijing, pointed out that a large number of tax payers are not investing in the stock market: “It’s not fair if they have to [bear the] burden [of] the loss when the market falls," he said in an article posted on CKGSB Knowledge.  

As the stock tumble continues however, there is no word from the authorities on what they plan to do next.
“If [the government] does nothing then all its previous efforts will have been wasted,” Zhu Ning, deputy dean at Shanghai Advanced Institute of Finance, told the Financial Times. “But if they continue with the rescue efforts then the hole will get bigger and bigger.”

Zhen Xie, president of CEIBS’ Investment Club, and an MBA student, said that the stock rout is just a “temporary blip”. He believes that the Shanghai Composite could reach as much as 4100 by September. It closed at 3709.33 on Thursday, down nearly 30% over the past month.

Meanwhile, Chinese authorities are investigating “malicious” short-selling, in which an investor sells borrowed stock to bet on its share price falling.

Zhao Xijun, deputy dean of the School of Finance at Beijing’s Renmin University, said: “The government feels compelled to send a clear message: that on the one hand they are supporting the market and, on the other hand, they’re cracking down on any activities that could destabilize the market.”