China's hot stock market —is it healthy?

“What about your stocks – what is your return on investment?”

Whenever in a taxi or in the supermarket, even in the classroom, you’re very likely to hear this popular question in China nowadays.

The Shanghai Securities Composite Index has reached its highest level rapidly since the 2008 financial crisis, which is really uncommon. Since the end of 2014, the index has grown from around 2100 to 4500 points this month – more than double in less than one year.

But what sets the Chinese market apart from other countries’ is that the growth of the real economy doesn’t match the growth of the stock market. The GDP growth rate has lowered to 7%, showing that the rapid growth is actually not supported by the real economy.

Expert opinions differ on whether or not it is a healthy boom, and how long can it last. Still, there are two factors that might help explain this uncommon growth.

First, we need to pay attention to a special group of people: the “Da ma”, a Chinese term used to refer to housewives or retired women aged from 40-70. Many of them have limited financial knowledge and investment experience, but surprisingly, they have recently emerged as an active group in the stock market. According to China Central Depository & Clearing (CCDC), the number of new accounts opened per month has increased by 400% during the past few months – and the “Da ma” own a large percentage of them.

Another theory is that this round of growth is appreciated and manipulated by the Chinese government. The government needs funds for constructions and investment in order to promote economic growth. This theory does have some supporting evidence: for example, the People's Bank of China has lowered the interest rate and reserve requirement ratio, which has led to far-reaching, substantial gains for the stock market.

It will be interesting to continue following the trend of the stock market in China to see if these theories hold true.



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