CKGSB Prof: Government’s Improper Response Intensified China’s Market Disruption

August 01, 2015

During an interview with Chosun Biz, one of most influential business media in Korea, Professor Liu Jing pointed out that the reason for the current market crash is quite different from former financial crises in 2002 and 2008, since the backdrop of problems can be traced to the boom of margin trading, including short sellers.

Liu Jing, Professor of Accounting and Finance at Cheung Kong Graduate School of Business, pointed out the reasons behind China’s current stock market crisis. According to his interview with Chosun Biz, one of the most influential online business media in Korea, the recent panic has been caused by indiscreet margin trading, such as short selling.

Q: How do you analyze the current Chinese stock market?
A: It cannot be simply explained. The recent and sudden drop in the stock market is basically because the bubble burst. However, it is different from normal cases, because most of the bubbles were generated in new listings. Their P/E (Price to Earnings) ratio hit up to 300, which was extraordinarily high. Eventually the bubble burst and the stock index dropped significantly.

This case is more dangerous than two previous market crashes in China because many people had got loans from banks and trust companies to buy stocks. Such types of credit transactions are risky because if the stock price falls, people have to sell their stock and swallow big losses.


Q: Some people believe that short selling is the cause of the recent market crash. Do you agree?

A: Short sellers are always blamed in stock crashes, but they are not the main culprit for this disaster. The bursting of bubbles on the mainland are the most direct and consequential causes. The government is obviously trying to support the market with a great deal of measures including watching short selling, but I feel the support came out too early at too high a level. The problem is that this kind of support can directly affect the market and it would encourage more speculation.


Q: What do you think about Hugangtong’s impact on the crash?

A: I do not believe the Hugangtong [Shanghai-Hong Kong stock connect] is the reason for the crash in stock prices. The crash is more concentrated on new or smaller companies with very high valuations, not large companies being traded on the Hugangtong. Rather, the crash in mainland stocks may have some effect on Hong Kong through the Hugangtong, since some stocks are now directly linked.


Q: How do you forecast the future of the Chinese economy?

A: Economic growth in China was high enough to record 9% annually over the past few years. Now it is 7%, but it deemed to be lower than 7% lately. However, China’s economy has been growing steadily compared to the US or Europe.

There are many rural areas that remain undeveloped in China, which have the potential to grow in accordance with Beijing and Shanghai‘s model. These cities are the key to raising the productivity of China’s economy in the future.

To read the original article in Korean, please click here.

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