1 00:00:02,440 --> 00:00:08,960 Speaker 1: Bloomberg Audio Studios, Podcasts, radio news. 2 00:00:09,240 --> 00:00:11,799 Speaker 2: I'm Stephen Carol and this is Here's Why, where we 3 00:00:11,840 --> 00:00:14,080 Speaker 2: take one news story and explain it in just a 4 00:00:14,080 --> 00:00:23,960 Speaker 2: few minutes with our experts here at Bloomberg. It's been 5 00:00:24,079 --> 00:00:26,920 Speaker 2: a wild time on Chinese stock markets. 6 00:00:27,080 --> 00:00:29,640 Speaker 3: The Sea signed three hundred actually poise for its best 7 00:00:29,680 --> 00:00:32,400 Speaker 3: daily rally in sixteen years. 8 00:00:32,040 --> 00:00:36,000 Speaker 1: Hong Kong shares jumping almost six percent. We have developers, 9 00:00:36,040 --> 00:00:40,320 Speaker 1: in particular doing gangbusters right now. 10 00:00:40,400 --> 00:00:44,120 Speaker 3: Cheap valuation is never enough to turn around a market. 11 00:00:44,240 --> 00:00:48,480 Speaker 3: But when you have valuation and catalysts, which is taking 12 00:00:48,520 --> 00:00:51,519 Speaker 3: place in the form of stimulus hopes, you see this 13 00:00:51,640 --> 00:00:54,160 Speaker 3: incredible momentum, which is what we're leni into. 14 00:00:54,640 --> 00:00:57,600 Speaker 2: Investors in Chinese equities are used to feeling like they're 15 00:00:57,600 --> 00:01:00,560 Speaker 2: on a roller coaster. The late September Ali saw the 16 00:01:00,600 --> 00:01:03,200 Speaker 2: biggest gain since two thousand and eight, but it came 17 00:01:03,240 --> 00:01:06,520 Speaker 2: after months of declines. A quick search of Bloomberg stories 18 00:01:06,520 --> 00:01:10,760 Speaker 2: about China's markets turns up phrases like harrowing losses, wild swings, 19 00:01:10,760 --> 00:01:15,560 Speaker 2: and even stocks euphoria. So here's why China's stock markets 20 00:01:15,640 --> 00:01:21,400 Speaker 2: just work differently. Our managing editor for eight Equities, leanting 21 00:01:21,480 --> 00:01:24,440 Speaker 2: two is with me for more the hunting. Firstly, for 22 00:01:24,560 --> 00:01:27,800 Speaker 2: context from a global perspective, how big are the Chinese 23 00:01:27,840 --> 00:01:28,640 Speaker 2: stock markets? 24 00:01:28,920 --> 00:01:31,640 Speaker 1: Chinese stock market is actually the second largest in the world, 25 00:01:31,840 --> 00:01:34,960 Speaker 1: behind the US in terms of market cap. We're talking 26 00:01:34,959 --> 00:01:38,600 Speaker 1: about ten trillion dollars, and if you count Hong Kong, 27 00:01:38,720 --> 00:01:42,479 Speaker 1: which is about six trillion dollars, the combined market cap 28 00:01:42,600 --> 00:01:45,319 Speaker 1: is about sixteen trillion dollars and that is about a 29 00:01:45,400 --> 00:01:48,840 Speaker 1: quarter of the market cap size in the US. So 30 00:01:49,000 --> 00:01:52,040 Speaker 1: still relatively small compared with the US, but it's quite 31 00:01:52,040 --> 00:01:53,120 Speaker 1: a sizable market. 32 00:01:53,600 --> 00:01:56,520 Speaker 2: How do markets in China though, compared to stock markets 33 00:01:56,520 --> 00:02:00,720 Speaker 2: elsewhere in terms of investors or liquidity, Yeah. 34 00:02:00,360 --> 00:02:04,040 Speaker 1: China has its own unique characteristics. The market is relatively 35 00:02:04,080 --> 00:02:06,720 Speaker 1: young compared with the likes of the US and some 36 00:02:06,760 --> 00:02:11,120 Speaker 1: other developed markets. It is dominated by retail traders. We're 37 00:02:11,160 --> 00:02:15,760 Speaker 1: talking about retail turnover, accounting for about seventy percent of 38 00:02:15,760 --> 00:02:19,920 Speaker 1: total turnover in China, and in developed markets like in 39 00:02:19,960 --> 00:02:25,079 Speaker 1: the US, we're looking at very professional, investor dominated trading. 40 00:02:25,400 --> 00:02:28,520 Speaker 1: So because of that, Chinese markets are actually a bit 41 00:02:28,520 --> 00:02:32,000 Speaker 1: more irrational, a bit more sort of volatile. And also, 42 00:02:32,480 --> 00:02:35,280 Speaker 1: you know, the government has rolled out a lot of 43 00:02:35,360 --> 00:02:40,399 Speaker 1: intervention and market related reforms and different kind of crackdowns 44 00:02:40,440 --> 00:02:43,360 Speaker 1: over the years. So that has really been the driving 45 00:02:43,720 --> 00:02:47,359 Speaker 1: force on the stock market versus the developed markets like 46 00:02:47,400 --> 00:02:49,920 Speaker 1: the US, which is a little bit more reflective of 47 00:02:49,960 --> 00:02:51,240 Speaker 1: the economic fundamentals. 48 00:02:51,560 --> 00:02:53,520 Speaker 2: I mean, you could say more volatile and more exciting 49 00:02:53,600 --> 00:02:55,560 Speaker 2: depending on what you're getting out of that's right. Bring 50 00:02:55,680 --> 00:02:58,480 Speaker 2: these markets as well give us sort of a scale 51 00:02:58,520 --> 00:03:01,800 Speaker 2: idea of the differences in volatility. So you've explained some 52 00:03:01,880 --> 00:03:05,080 Speaker 2: of the foundations of why they say is but what 53 00:03:05,200 --> 00:03:08,000 Speaker 2: makes the markets more volatile than others that you've mentioned. 54 00:03:08,320 --> 00:03:11,120 Speaker 1: The retail traders actually account for a big chunk of 55 00:03:11,120 --> 00:03:14,840 Speaker 1: stock trading in China, and their trading is usually based 56 00:03:14,880 --> 00:03:18,840 Speaker 1: on some kind of sentiment driven decision making or they 57 00:03:18,919 --> 00:03:22,760 Speaker 1: hear something from social media or from some kind of influencers. 58 00:03:23,080 --> 00:03:26,160 Speaker 1: So a lot of the decision making is very detached 59 00:03:26,240 --> 00:03:30,480 Speaker 1: from the fundamentals of companies earnings. And also just a 60 00:03:30,520 --> 00:03:33,880 Speaker 1: sheer number of retail traders out there in China and 61 00:03:33,919 --> 00:03:37,120 Speaker 1: they all go in usually towards the same direction, and 62 00:03:37,280 --> 00:03:41,000 Speaker 1: that's also making the market very momentum driven, and that 63 00:03:41,200 --> 00:03:44,320 Speaker 1: all contributes to the kind of high volatility. And if 64 00:03:44,320 --> 00:03:47,360 Speaker 1: you look at the metrics ten day volatility for the 65 00:03:47,400 --> 00:03:50,320 Speaker 1: CSI three hundred, which is a benchmark for on shore 66 00:03:50,400 --> 00:03:54,720 Speaker 1: China stock market. We're looking at between thirty to fifty 67 00:03:54,920 --> 00:03:57,600 Speaker 1: sort of points for the VOW index over the past 68 00:03:57,640 --> 00:04:00,560 Speaker 1: five years or so, and that is double that of 69 00:04:00,760 --> 00:04:01,840 Speaker 1: the S and P five hundred. 70 00:04:02,160 --> 00:04:04,520 Speaker 2: You mentioned. The onshore exchange is there as well on 71 00:04:04,680 --> 00:04:08,400 Speaker 2: Hong Kong. How different is Hong Kong to those mainland exchanges. 72 00:04:08,720 --> 00:04:11,920 Speaker 1: Yeah, it's Hong Kong. The unique thing about Hong Kong 73 00:04:12,040 --> 00:04:15,200 Speaker 1: is is still very much an open market. Everybody can 74 00:04:15,200 --> 00:04:17,600 Speaker 1: come and go, they can buy, they can sell, they 75 00:04:17,640 --> 00:04:20,560 Speaker 1: can do whatever they want, and the onshore market still 76 00:04:20,920 --> 00:04:24,200 Speaker 1: has a lot of capital control. So there is stock 77 00:04:24,240 --> 00:04:27,400 Speaker 1: connect between Hong Kong and China, but that is still 78 00:04:27,440 --> 00:04:31,080 Speaker 1: a very small window for foreign investors going into China. 79 00:04:31,120 --> 00:04:34,520 Speaker 1: A majority of Chinese stock market owners are still very 80 00:04:34,640 --> 00:04:37,360 Speaker 1: much local investors. We're talking about more than ninety percent. 81 00:04:37,480 --> 00:04:40,279 Speaker 1: But for the Hong Kong market, lots of trading is 82 00:04:40,320 --> 00:04:44,279 Speaker 1: actually driven by global funds, so it is quite a 83 00:04:44,320 --> 00:04:47,800 Speaker 1: free capital market, which also means Hong Kong market can 84 00:04:47,839 --> 00:04:51,520 Speaker 1: be sometimes a lot more volatile than the onshore market. 85 00:04:51,960 --> 00:04:56,800 Speaker 2: Even more exciting. When we're looking at these markets, we're 86 00:04:56,800 --> 00:04:59,960 Speaker 2: often tracking what announcements are coming, particularly in recent time 87 00:05:00,400 --> 00:05:04,640 Speaker 2: in terms of stimulus. How useful a proxy are the 88 00:05:04,760 --> 00:05:07,040 Speaker 2: Chinese stock markets for the Chinese economy? 89 00:05:07,640 --> 00:05:07,880 Speaker 3: Yeah? 90 00:05:07,960 --> 00:05:11,560 Speaker 1: Overall, I would say the Chinese onshore stock market is 91 00:05:11,680 --> 00:05:16,400 Speaker 1: rather reflective of the underlying economy just by looking at 92 00:05:16,440 --> 00:05:20,520 Speaker 1: the members the composition. The companies with big waitings are 93 00:05:20,520 --> 00:05:25,680 Speaker 1: the soees, the state owned enterprises, big banks, big railway companies, 94 00:05:25,960 --> 00:05:29,480 Speaker 1: construction companies, and there is also a few very big 95 00:05:29,480 --> 00:05:34,039 Speaker 1: private enterprises such as Quecho Maltai, and also the up 96 00:05:34,080 --> 00:05:38,720 Speaker 1: and coming Cattle which is the global leading battery maker. 97 00:05:38,960 --> 00:05:42,200 Speaker 1: So I would say it's a good reflection of the economy. 98 00:05:42,320 --> 00:05:46,560 Speaker 1: But because of the kind of momentum driven nature of 99 00:05:46,800 --> 00:05:50,159 Speaker 1: stock trading in China, sometimes the performance of the market 100 00:05:50,200 --> 00:05:53,400 Speaker 1: can be rather detached from the underlying economy. 101 00:05:53,680 --> 00:05:56,279 Speaker 2: Does that mean that we should expect to see this 102 00:05:56,480 --> 00:06:01,039 Speaker 2: volatility continue as we monitor the elopments on the markets 103 00:06:01,080 --> 00:06:02,200 Speaker 2: in China? 104 00:06:02,279 --> 00:06:04,880 Speaker 1: I would say yes. Another element I want to bring 105 00:06:04,960 --> 00:06:09,039 Speaker 1: out is the high frequency trading companies, and then we're 106 00:06:09,080 --> 00:06:12,760 Speaker 1: seeing a good amount of those companies some mushrooming in 107 00:06:12,880 --> 00:06:16,040 Speaker 1: China on shore China over the last few years, and 108 00:06:16,120 --> 00:06:20,280 Speaker 1: that has actually contributed to the higher volatility on shore 109 00:06:20,600 --> 00:06:23,520 Speaker 1: and in Hong Kong. I think just because of the 110 00:06:23,680 --> 00:06:26,520 Speaker 1: prolonged slump in Hong Kong's stock market, A lot of 111 00:06:26,560 --> 00:06:29,800 Speaker 1: the traders right now are fast money hedge funds, and 112 00:06:29,920 --> 00:06:33,000 Speaker 1: they also do a lot of high frequency trading, which 113 00:06:33,040 --> 00:06:36,000 Speaker 1: means they come and go within seconds. That can make 114 00:06:36,080 --> 00:06:38,560 Speaker 1: the market a lot more volatile as well. So I'd 115 00:06:38,640 --> 00:06:43,320 Speaker 1: say yes, the enthusiasm and also the kind of composition 116 00:06:43,640 --> 00:06:46,640 Speaker 1: of a trader base right now on shore and offshore 117 00:06:46,960 --> 00:06:50,360 Speaker 1: would make the market a lot more volatile going forward. 118 00:06:50,800 --> 00:06:54,320 Speaker 2: Thanks to our managing editor for Asian Equities Leanting Too. 119 00:06:54,760 --> 00:06:56,880 Speaker 2: For more explanations like this from our team of twenty 120 00:06:56,920 --> 00:06:59,640 Speaker 2: seven hundred journalists and analysts around the world, search for 121 00:06:59,720 --> 00:07:02,799 Speaker 2: Quick Take on the Bloomberg website or Bloomberg Business App. 122 00:07:04,360 --> 00:07:07,120 Speaker 2: I'm Stephen Carol. This is Here's why. I'll be back 123 00:07:07,200 --> 00:07:09,159 Speaker 2: next week with more. Thanks for listening.