There were 254 times with a big stock index movement on the Shanghai Stock Exchange in terms of the 3% change threshold in the daily SHCI. Figure 3.2 shows the big index movements caused by government policy (dark bars) and the non-policy caused movements (medium-tone bars). According to Fig. 3.2, over two-thirds of the big index movements in the sample period occurred in 2007, 2008, 2009 and 2015; the amounts of big index movements are 35, 65, 27 and 43, respectively.
Based on the news articles closely related to market reviews of daily stock trading on the Shanghai Stock Exchange, all explanations of the big index movements are collected, and the
summarized information is presented in Table 3.7. According to results in Table 3.7, 151 of 254 big index movements were caused by different kinds of government policy with a proportion of 0.6; i.e., over half of the big index movements were caused by government policies during the study sample time.
Among the four types of stock market-related policies, regulatory policy contributes to half of the big index movements caused by government policy, followed by monetary policy. Fiscal policy accounts for only three times of the big jumps in the SHCI in nearly 16 years while 40% of the big index movements were caused by market forces other than government policy.
Figure 3.2 Yearly Count of Daily Stock Market Movements of the SHCI36
Note: The threshold of daily index movement in the SHCI is 3% .
Source: Author‘s summaries based on the Wind database.
Based on detailed information in relevant articles, the results show that only seven times were big index changes caused by monetary policy implementation; four times by a reserve ratio adjustment and three times by an interest rate adjustment by the Central Bank of China. Therefore, 34 of the 41 monetary policy-related index jumps resulted from the market expectations of stock investors or by market rumours about possible future changes in monetary policy. The result implies that policy-related concerns are more likely to affect market sentiment and investors‘ decisions rather than publication of monetary policy
36 The sample time is from January 2001 to March 2016. The figure is drawn based on the data collected from Wind Database, and the detailed information is shown in Appendix Table: D.1.
50 40 30 20 10 0 10 20 30 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Global financial crisis "Reform-driven bullilsh market" State-owned shares reduction Liquidity-driven bullish market
Four trillion yuan stimulus package
adjustments in China‘s stock markets. In addition, compared with daily regulatory activities and the release of new regulations and laws, active market intervention by regulatory authorities relatively easily causes more uncertainty in the stock market and thus results in more big movements in the SHCI.
Table 3.7 Causes of Big Movements in the SHCI
Explanation Policy Category Counts Percentage (%) Percentage (%)
Causes related to government policy Monetary Policy 41 16 60 Fiscal Policy 7 3 Regulatory Policy 75 30
Other Economic Policy 28 11
Non-policy 103 40 40
Overall 254 100 100
Note: The threshold of the daily index movement is 3% .
Source: Author‘s calculation based on the article counts in the CSJ.
Figure 3.3 Yearly Count of Daily Stock Market Movements of the SHCI37
Note: The threshold of daily index movement is 5% .
Source: Author‘s summaries based on the Wind database.
An index movement of 5% or more means the stock market is filled with extreme sentiments of stock investors. During this study‘s sample period from 2001 to 2016, there were 60
37 The sample time is from January 2001 to March 2016. The figure is based on data collected from the Wind
15 10 5 0 5 10 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Liquidity-driven bullish market
Global financial crisis Four trillion yuan stimulus package
"Reform-driven bullilsh market"
State-owned shares reduction
trading days with abnormal stock index movements on the Shanghai Stock Exchange in terms of a 5% threshold change in the SHCI. Figure 3.3 shows the abnormal movements; those largely caused by government policies displayed by dark bars and the non-policy-caused movements by medium-tone bars.
According to the information in Figure 3.3, 2008 and 2015 account for 60% of the abnormal index movements in the sample of over 15 years; there were 22 and 14 abnormal index movements in 2008 and 2015, respectively. Figure 3.3 also shows the global financial crisis in 2008, which resulted in huge stock market volatility in the US as well as in China. In 2015, it is believed that severe government interference was the major cause of the abnormal fluctuations in China‘s stock market (Cui & Yi, 2016).
Table 3.8 The Causes of Abnormal Movements in the SHCI
Explanation Policy Category Counts Percentage (%) Percentage (%)
Causes related to government policy Monetary Policy 7 12 77 Fiscal Policy 3 5 Regulatory Policy 30 50
Other Economic Policy 6 10
Non-policy 14 23 23
Overall 60 100 100
Notes: The threshold of the daily index movement is5% .
Source: Author‘s calculation based on the article counts in the CSJ.
Based on newspaper articles related to the daily performance of the stock market, explanations for all the huge jumps in the SHCI are collected and classified in terms of the different types of government policy. Table 3.8 presents the abnormal index movements by policy category for the Shanghai Stock Exchange from January 2001 to March 2016. According to the results in Table 3.8, 46 of 60 abnormal index movements were caused by different kinds of government policy, an overall proportion of 0.77, which indicates that over three-quarters of the abnormal index movements were caused by government policy during the sample period.
Among the four types of policy, regulatory policy contributed 65% of the huge index movements, followed by monetary policy, with 15%, of the abnormal index movements. Fiscal policy accounted for only 5% of the huge jumps in the SHCI in nearly 16 years and 10% of the abnormal index movements were caused by other kinds of economic policy. Further, 14 of the 60 huge index jumps resulted from the global financial crisis or other market forces.
This implies that regulatory policy was the main cause of the abnormal index movements in China‘s stock market even though the great global financial crisis occurred during the sample period.
During the stock market crash of 2015 in China, regulatory policy contributed to over 80% of abnormal index movements. According to explanations in newspaper articles, official comments about the regulation of margin trading and the stock market bailout resulted in over 10 of the abnormal jumps in China‘s stock market in June-August 2015.
Similarly, according to explanations extracted from the stock market comments in the CSJ, only one of seven huge index changes were caused by an adjustment to the deposit-reserve ratio. The other six monetary policy-related index jumps resulted from market expectations and market rumours relating to the future changes in the monetary policy.
In summary, we can conclude the following:
First, policy risk or uncertainty is the major cause of unusual volatility in China‘s stock market. As identified by the analysis above, with both 3%and 5% threshold settings, over half of the big index movements of the SHCI were closely related to different kinds of government policy. The proportion of policy-caused movements could be over 80% if all the jumps caused by the global financial crisis in 2008 are excluded from the data. Therefore, it is safe to say that, in practice, most abnormal movements in China‘s stock market were caused by policy risk between 2001 and 2016 and the proportion could be possibly higher if there were no external financial shocks.
Second, among the different kinds of government policy, regulatory policy is the most significant factor in triggering huge market volatility; it gradually strengthens market expectations and results in the policy-driven effect in China‘s stock market. The results imply that market participants are remarkably sensitive to the regulator‘s attitudes as well as regulatory activities towards the stock market.
Third, compared with the disclosed monetary policy implementation, market expectations and market rumours of possible adjustments in monetary policy are more likely to influence volatility in the stock market. This means that the risk or uncertainty caused by policies rather than policies themselves is the main cause of fluctuations in China‘s stock market.
Last, official comments about the stock market can possibly cause big movements in the stock index. In China, under special political circumstances, frequent official comments are usually
considered a prelude to a significant looming policy change. As a result, the effect of open mouth operation can significantly influence the volatility of China‘s stock market. For example, to stabilize investors‘ expectations of the stock market, the president of CSRC, Shiyu Liu, commented on the potential exit of CSFC (China Securities Finance Corporation, which was founded by the central government of China on 28 October, 2011, with the aim to stabilize the stock market) that ‗the CSFC will keep functioning in the stock markets for a long time in future‘. It is believed this helped smooth stock market volatility38.