China’s Abnormal Stock Market
China's stock market has plunged yet again, and it is likely to fall further. The big question now is whether the recent volatility will spill over into other asset markets and the real economy.
LONDON – China’s stock market has plunged yet again, this time by 8.5% – the market’s second-largest fall in a single day, and the largest since the global financial crisis. The roller-coaster ride is far from over.
In fact, China’s stock market is more like a casino than an amusement-park attraction. Retail investors account for 85% of trades, in contrast to other major markets, where institutional investors – with their relative abundance of information – are the biggest traders.
The result, no surprise, is an extremely volatile market, in which rumor and emotion play an outsize role in driving outcomes. And that volatility is the other reason why the casino metaphor applies: China’s stock market can rise or fall by double digits without triggering a wider economic crash – at least so far. For example, China’s GDP growth was unaffected (in fact, the economy was growing at nearly 10%) when the stock market lost half of its value between 2001 and 2005 – or, for that matter, when the market then recovered (only to fall dramatically again after the 2008 financial crisis).
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