WEBVTT - Here's Why China's Stock Markets Just Work Differently

0:00:02.440 --> 0:00:08.960
<v Speaker 1>Bloomberg Audio Studios, Podcasts, radio news.

0:00:09.240 --> 0:00:11.799
<v Speaker 2>I'm Stephen Carol and this is Here's Why, where we

0:00:11.840 --> 0:00:14.080
<v Speaker 2>take one news story and explain it in just a

0:00:14.080 --> 0:00:23.960
<v Speaker 2>few minutes with our experts here at Bloomberg. It's been

0:00:24.079 --> 0:00:26.920
<v Speaker 2>a wild time on Chinese stock markets.

0:00:27.080 --> 0:00:29.640
<v Speaker 3>The Sea signed three hundred actually poise for its best

0:00:29.680 --> 0:00:32.400
<v Speaker 3>daily rally in sixteen years.

0:00:32.040 --> 0:00:36.000
<v Speaker 1>Hong Kong shares jumping almost six percent. We have developers,

0:00:36.040 --> 0:00:40.320
<v Speaker 1>in particular doing gangbusters right now.

0:00:40.400 --> 0:00:44.120
<v Speaker 3>Cheap valuation is never enough to turn around a market.

0:00:44.240 --> 0:00:48.480
<v Speaker 3>But when you have valuation and catalysts, which is taking

0:00:48.520 --> 0:00:51.519
<v Speaker 3>place in the form of stimulus hopes, you see this

0:00:51.640 --> 0:00:54.160
<v Speaker 3>incredible momentum, which is what we're leni into.

0:00:54.640 --> 0:00:57.600
<v Speaker 2>Investors in Chinese equities are used to feeling like they're

0:00:57.600 --> 0:01:00.560
<v Speaker 2>on a roller coaster. The late September Ali saw the

0:01:00.600 --> 0:01:03.200
<v Speaker 2>biggest gain since two thousand and eight, but it came

0:01:03.240 --> 0:01:06.520
<v Speaker 2>after months of declines. A quick search of Bloomberg stories

0:01:06.520 --> 0:01:10.760
<v Speaker 2>about China's markets turns up phrases like harrowing losses, wild swings,

0:01:10.760 --> 0:01:15.560
<v Speaker 2>and even stocks euphoria. So here's why China's stock markets

0:01:15.640 --> 0:01:21.400
<v Speaker 2>just work differently. Our managing editor for eight Equities, leanting

0:01:21.480 --> 0:01:24.440
<v Speaker 2>two is with me for more the hunting. Firstly, for

0:01:24.560 --> 0:01:27.800
<v Speaker 2>context from a global perspective, how big are the Chinese

0:01:27.840 --> 0:01:28.640
<v Speaker 2>stock markets?

0:01:28.920 --> 0:01:31.640
<v Speaker 1>Chinese stock market is actually the second largest in the world,

0:01:31.840 --> 0:01:34.960
<v Speaker 1>behind the US in terms of market cap. We're talking

0:01:34.959 --> 0:01:38.600
<v Speaker 1>about ten trillion dollars, and if you count Hong Kong,

0:01:38.720 --> 0:01:42.479
<v Speaker 1>which is about six trillion dollars, the combined market cap

0:01:42.600 --> 0:01:45.319
<v Speaker 1>is about sixteen trillion dollars and that is about a

0:01:45.400 --> 0:01:48.840
<v Speaker 1>quarter of the market cap size in the US. So

0:01:49.000 --> 0:01:52.040
<v Speaker 1>still relatively small compared with the US, but it's quite

0:01:52.040 --> 0:01:53.120
<v Speaker 1>a sizable market.

0:01:53.600 --> 0:01:56.520
<v Speaker 2>How do markets in China though, compared to stock markets

0:01:56.520 --> 0:02:00.720
<v Speaker 2>elsewhere in terms of investors or liquidity, Yeah.

0:02:00.360 --> 0:02:04.040
<v Speaker 1>China has its own unique characteristics. The market is relatively

0:02:04.080 --> 0:02:06.720
<v Speaker 1>young compared with the likes of the US and some

0:02:06.760 --> 0:02:11.120
<v Speaker 1>other developed markets. It is dominated by retail traders. We're

0:02:11.160 --> 0:02:15.760
<v Speaker 1>talking about retail turnover, accounting for about seventy percent of

0:02:15.760 --> 0:02:19.920
<v Speaker 1>total turnover in China, and in developed markets like in

0:02:19.960 --> 0:02:25.079
<v Speaker 1>the US, we're looking at very professional, investor dominated trading.

0:02:25.400 --> 0:02:28.520
<v Speaker 1>So because of that, Chinese markets are actually a bit

0:02:28.520 --> 0:02:32.000
<v Speaker 1>more irrational, a bit more sort of volatile. And also,

0:02:32.480 --> 0:02:35.280
<v Speaker 1>you know, the government has rolled out a lot of

0:02:35.360 --> 0:02:40.399
<v Speaker 1>intervention and market related reforms and different kind of crackdowns

0:02:40.440 --> 0:02:43.360
<v Speaker 1>over the years. So that has really been the driving

0:02:43.720 --> 0:02:47.359
<v Speaker 1>force on the stock market versus the developed markets like

0:02:47.400 --> 0:02:49.920
<v Speaker 1>the US, which is a little bit more reflective of

0:02:49.960 --> 0:02:51.240
<v Speaker 1>the economic fundamentals.

0:02:51.560 --> 0:02:53.520
<v Speaker 2>I mean, you could say more volatile and more exciting

0:02:53.600 --> 0:02:55.560
<v Speaker 2>depending on what you're getting out of that's right. Bring

0:02:55.680 --> 0:02:58.480
<v Speaker 2>these markets as well give us sort of a scale

0:02:58.520 --> 0:03:01.800
<v Speaker 2>idea of the differences in volatility. So you've explained some

0:03:01.880 --> 0:03:05.080
<v Speaker 2>of the foundations of why they say is but what

0:03:05.200 --> 0:03:08.000
<v Speaker 2>makes the markets more volatile than others that you've mentioned.

0:03:08.320 --> 0:03:11.120
<v Speaker 1>The retail traders actually account for a big chunk of

0:03:11.120 --> 0:03:14.840
<v Speaker 1>stock trading in China, and their trading is usually based

0:03:14.880 --> 0:03:18.840
<v Speaker 1>on some kind of sentiment driven decision making or they

0:03:18.919 --> 0:03:22.760
<v Speaker 1>hear something from social media or from some kind of influencers.

0:03:23.080 --> 0:03:26.160
<v Speaker 1>So a lot of the decision making is very detached

0:03:26.240 --> 0:03:30.480
<v Speaker 1>from the fundamentals of companies earnings. And also just a

0:03:30.520 --> 0:03:33.880
<v Speaker 1>sheer number of retail traders out there in China and

0:03:33.919 --> 0:03:37.120
<v Speaker 1>they all go in usually towards the same direction, and

0:03:37.280 --> 0:03:41.000
<v Speaker 1>that's also making the market very momentum driven, and that

0:03:41.200 --> 0:03:44.320
<v Speaker 1>all contributes to the kind of high volatility. And if

0:03:44.320 --> 0:03:47.360
<v Speaker 1>you look at the metrics ten day volatility for the

0:03:47.400 --> 0:03:50.320
<v Speaker 1>CSI three hundred, which is a benchmark for on shore

0:03:50.400 --> 0:03:54.720
<v Speaker 1>China stock market. We're looking at between thirty to fifty

0:03:54.920 --> 0:03:57.600
<v Speaker 1>sort of points for the VOW index over the past

0:03:57.640 --> 0:04:00.560
<v Speaker 1>five years or so, and that is double that of

0:04:00.760 --> 0:04:01.840
<v Speaker 1>the S and P five hundred.

0:04:02.160 --> 0:04:04.520
<v Speaker 2>You mentioned. The onshore exchange is there as well on

0:04:04.680 --> 0:04:08.400
<v Speaker 2>Hong Kong. How different is Hong Kong to those mainland exchanges.

0:04:08.720 --> 0:04:11.920
<v Speaker 1>Yeah, it's Hong Kong. The unique thing about Hong Kong

0:04:12.040 --> 0:04:15.200
<v Speaker 1>is is still very much an open market. Everybody can

0:04:15.200 --> 0:04:17.600
<v Speaker 1>come and go, they can buy, they can sell, they

0:04:17.640 --> 0:04:20.560
<v Speaker 1>can do whatever they want, and the onshore market still

0:04:20.920 --> 0:04:24.200
<v Speaker 1>has a lot of capital control. So there is stock

0:04:24.240 --> 0:04:27.400
<v Speaker 1>connect between Hong Kong and China, but that is still

0:04:27.440 --> 0:04:31.080
<v Speaker 1>a very small window for foreign investors going into China.

0:04:31.120 --> 0:04:34.520
<v Speaker 1>A majority of Chinese stock market owners are still very

0:04:34.640 --> 0:04:37.360
<v Speaker 1>much local investors. We're talking about more than ninety percent.

0:04:37.480 --> 0:04:40.279
<v Speaker 1>But for the Hong Kong market, lots of trading is

0:04:40.320 --> 0:04:44.279
<v Speaker 1>actually driven by global funds, so it is quite a

0:04:44.320 --> 0:04:47.800
<v Speaker 1>free capital market, which also means Hong Kong market can

0:04:47.839 --> 0:04:51.520
<v Speaker 1>be sometimes a lot more volatile than the onshore market.

0:04:51.960 --> 0:04:56.800
<v Speaker 2>Even more exciting. When we're looking at these markets, we're

0:04:56.800 --> 0:04:59.960
<v Speaker 2>often tracking what announcements are coming, particularly in recent time

0:05:00.400 --> 0:05:04.640
<v Speaker 2>in terms of stimulus. How useful a proxy are the

0:05:04.760 --> 0:05:07.040
<v Speaker 2>Chinese stock markets for the Chinese economy?

0:05:07.640 --> 0:05:07.880
<v Speaker 3>Yeah?

0:05:07.960 --> 0:05:11.560
<v Speaker 1>Overall, I would say the Chinese onshore stock market is

0:05:11.680 --> 0:05:16.400
<v Speaker 1>rather reflective of the underlying economy just by looking at

0:05:16.440 --> 0:05:20.520
<v Speaker 1>the members the composition. The companies with big waitings are

0:05:20.520 --> 0:05:25.680
<v Speaker 1>the soees, the state owned enterprises, big banks, big railway companies,

0:05:25.960 --> 0:05:29.480
<v Speaker 1>construction companies, and there is also a few very big

0:05:29.480 --> 0:05:34.039
<v Speaker 1>private enterprises such as Quecho Maltai, and also the up

0:05:34.080 --> 0:05:38.720
<v Speaker 1>and coming Cattle which is the global leading battery maker.

0:05:38.960 --> 0:05:42.200
<v Speaker 1>So I would say it's a good reflection of the economy.

0:05:42.320 --> 0:05:46.560
<v Speaker 1>But because of the kind of momentum driven nature of

0:05:46.800 --> 0:05:50.159
<v Speaker 1>stock trading in China, sometimes the performance of the market

0:05:50.200 --> 0:05:53.400
<v Speaker 1>can be rather detached from the underlying economy.

0:05:53.680 --> 0:05:56.279
<v Speaker 2>Does that mean that we should expect to see this

0:05:56.480 --> 0:06:01.039
<v Speaker 2>volatility continue as we monitor the elopments on the markets

0:06:01.080 --> 0:06:02.200
<v Speaker 2>in China?

0:06:02.279 --> 0:06:04.880
<v Speaker 1>I would say yes. Another element I want to bring

0:06:04.960 --> 0:06:09.039
<v Speaker 1>out is the high frequency trading companies, and then we're

0:06:09.080 --> 0:06:12.760
<v Speaker 1>seeing a good amount of those companies some mushrooming in

0:06:12.880 --> 0:06:16.040
<v Speaker 1>China on shore China over the last few years, and

0:06:16.120 --> 0:06:20.280
<v Speaker 1>that has actually contributed to the higher volatility on shore

0:06:20.600 --> 0:06:23.520
<v Speaker 1>and in Hong Kong. I think just because of the

0:06:23.680 --> 0:06:26.520
<v Speaker 1>prolonged slump in Hong Kong's stock market, A lot of

0:06:26.560 --> 0:06:29.800
<v Speaker 1>the traders right now are fast money hedge funds, and

0:06:29.920 --> 0:06:33.000
<v Speaker 1>they also do a lot of high frequency trading, which

0:06:33.040 --> 0:06:36.000
<v Speaker 1>means they come and go within seconds. That can make

0:06:36.080 --> 0:06:38.560
<v Speaker 1>the market a lot more volatile as well. So I'd

0:06:38.640 --> 0:06:43.320
<v Speaker 1>say yes, the enthusiasm and also the kind of composition

0:06:43.640 --> 0:06:46.640
<v Speaker 1>of a trader base right now on shore and offshore

0:06:46.960 --> 0:06:50.360
<v Speaker 1>would make the market a lot more volatile going forward.

0:06:50.800 --> 0:06:54.320
<v Speaker 2>Thanks to our managing editor for Asian Equities Leanting Too.

0:06:54.760 --> 0:06:56.880
<v Speaker 2>For more explanations like this from our team of twenty

0:06:56.920 --> 0:06:59.640
<v Speaker 2>seven hundred journalists and analysts around the world, search for

0:06:59.720 --> 0:07:02.799
<v Speaker 2>Quick Take on the Bloomberg website or Bloomberg Business App.

0:07:04.360 --> 0:07:07.120
<v Speaker 2>I'm Stephen Carol. This is Here's why. I'll be back

0:07:07.200 --> 0:07:09.159
<v Speaker 2>next week with more. Thanks for listening.