Speaker 1: Bloomberg Audio Studios, Podcasts, radio news.
Speaker 2: I'm Stephen Carol and this is Here's Why, where we
Speaker 2: take one news story and explain it in just a
Speaker 2: few minutes with our experts here at Bloomberg. It's been
Speaker 2: a wild time on Chinese stock markets.
Speaker 3: The Sea signed three hundred actually poise for its best
Speaker 3: daily rally in sixteen years.
Speaker 1: Hong Kong shares jumping almost six percent. We have developers,
Speaker 1: in particular doing gangbusters right now.
Speaker 3: Cheap valuation is never enough to turn around a market.
Speaker 3: But when you have valuation and catalysts, which is taking
Speaker 3: place in the form of stimulus hopes, you see this
Speaker 3: incredible momentum, which is what we're leni into.
Speaker 2: Investors in Chinese equities are used to feeling like they're
Speaker 2: on a roller coaster. The late September Ali saw the
Speaker 2: biggest gain since two thousand and eight, but it came
Speaker 2: after months of declines. A quick search of Bloomberg stories
Speaker 2: about China's markets turns up phrases like harrowing losses, wild swings,
Speaker 2: and even stocks euphoria. So here's why China's stock markets
Speaker 2: just work differently. Our managing editor for eight Equities, leanting
Speaker 2: two is with me for more the hunting. Firstly, for
Speaker 2: context from a global perspective, how big are the Chinese
Speaker 2: stock markets?
Speaker 1: Chinese stock market is actually the second largest in the world,
Speaker 1: behind the US in terms of market cap. We're talking
Speaker 1: about ten trillion dollars, and if you count Hong Kong,
Speaker 1: which is about six trillion dollars, the combined market cap
Speaker 1: is about sixteen trillion dollars and that is about a
Speaker 1: quarter of the market cap size in the US. So
Speaker 1: still relatively small compared with the US, but it's quite
Speaker 1: a sizable market.
Speaker 2: How do markets in China though, compared to stock markets
Speaker 2: elsewhere in terms of investors or liquidity, Yeah.
Speaker 1: China has its own unique characteristics. The market is relatively
Speaker 1: young compared with the likes of the US and some
Speaker 1: other developed markets. It is dominated by retail traders. We're
Speaker 1: talking about retail turnover, accounting for about seventy percent of
Speaker 1: total turnover in China, and in developed markets like in
Speaker 1: the US, we're looking at very professional, investor dominated trading.
Speaker 1: So because of that, Chinese markets are actually a bit
Speaker 1: more irrational, a bit more sort of volatile. And also,
Speaker 1: you know, the government has rolled out a lot of
Speaker 1: intervention and market related reforms and different kind of crackdowns
Speaker 1: over the years. So that has really been the driving
Speaker 1: force on the stock market versus the developed markets like
Speaker 1: the US, which is a little bit more reflective of
Speaker 1: the economic fundamentals.
Speaker 2: I mean, you could say more volatile and more exciting
Speaker 2: depending on what you're getting out of that's right. Bring
Speaker 2: these markets as well give us sort of a scale
Speaker 2: idea of the differences in volatility. So you've explained some
Speaker 2: of the foundations of why they say is but what
Speaker 2: makes the markets more volatile than others that you've mentioned.
Speaker 1: The retail traders actually account for a big chunk of
Speaker 1: stock trading in China, and their trading is usually based
Speaker 1: on some kind of sentiment driven decision making or they
Speaker 1: hear something from social media or from some kind of influencers.
Speaker 1: So a lot of the decision making is very detached
Speaker 1: from the fundamentals of companies earnings. And also just a
Speaker 1: sheer number of retail traders out there in China and
Speaker 1: they all go in usually towards the same direction, and
Speaker 1: that's also making the market very momentum driven, and that
Speaker 1: all contributes to the kind of high volatility. And if
Speaker 1: you look at the metrics ten day volatility for the
Speaker 1: CSI three hundred, which is a benchmark for on shore
Speaker 1: China stock market. We're looking at between thirty to fifty
Speaker 1: sort of points for the VOW index over the past
Speaker 1: five years or so, and that is double that of
Speaker 1: the S and P five hundred.
Speaker 2: You mentioned. The onshore exchange is there as well on
Speaker 2: Hong Kong. How different is Hong Kong to those mainland exchanges.
Speaker 1: Yeah, it's Hong Kong. The unique thing about Hong Kong
Speaker 1: is is still very much an open market. Everybody can
Speaker 1: come and go, they can buy, they can sell, they
Speaker 1: can do whatever they want, and the onshore market still
Speaker 1: has a lot of capital control. So there is stock
Speaker 1: connect between Hong Kong and China, but that is still
Speaker 1: a very small window for foreign investors going into China.
Speaker 1: A majority of Chinese stock market owners are still very
Speaker 1: much local investors. We're talking about more than ninety percent.
Speaker 1: But for the Hong Kong market, lots of trading is
Speaker 1: actually driven by global funds, so it is quite a
Speaker 1: free capital market, which also means Hong Kong market can
Speaker 1: be sometimes a lot more volatile than the onshore market.
Speaker 2: Even more exciting. When we're looking at these markets, we're
Speaker 2: often tracking what announcements are coming, particularly in recent time
Speaker 2: in terms of stimulus. How useful a proxy are the
Speaker 2: Chinese stock markets for the Chinese economy?
Speaker 3: Yeah?
Speaker 1: Overall, I would say the Chinese onshore stock market is
Speaker 1: rather reflective of the underlying economy just by looking at
Speaker 1: the members the composition. The companies with big waitings are
Speaker 1: the soees, the state owned enterprises, big banks, big railway companies,
Speaker 1: construction companies, and there is also a few very big
Speaker 1: private enterprises such as Quecho Maltai, and also the up
Speaker 1: and coming Cattle which is the global leading battery maker.
Speaker 1: So I would say it's a good reflection of the economy.
Speaker 1: But because of the kind of momentum driven nature of
Speaker 1: stock trading in China, sometimes the performance of the market
Speaker 1: can be rather detached from the underlying economy.
Speaker 2: Does that mean that we should expect to see this
Speaker 2: volatility continue as we monitor the elopments on the markets
Speaker 2: in China?
Speaker 1: I would say yes. Another element I want to bring
Speaker 1: out is the high frequency trading companies, and then we're
Speaker 1: seeing a good amount of those companies some mushrooming in
Speaker 1: China on shore China over the last few years, and
Speaker 1: that has actually contributed to the higher volatility on shore
Speaker 1: and in Hong Kong. I think just because of the
Speaker 1: prolonged slump in Hong Kong's stock market, A lot of
Speaker 1: the traders right now are fast money hedge funds, and
Speaker 1: they also do a lot of high frequency trading, which
Speaker 1: means they come and go within seconds. That can make
Speaker 1: the market a lot more volatile as well. So I'd
Speaker 1: say yes, the enthusiasm and also the kind of composition
Speaker 1: of a trader base right now on shore and offshore
Speaker 1: would make the market a lot more volatile going forward.
Speaker 2: Thanks to our managing editor for Asian Equities Leanting Too.
Speaker 2: For more explanations like this from our team of twenty
Speaker 2: seven hundred journalists and analysts around the world, search for
Speaker 2: Quick Take on the Bloomberg website or Bloomberg Business App.
Speaker 2: I'm Stephen Carol. This is Here's why. I'll be back
Speaker 2: next week with more. Thanks for listening.