20 Years of Turbulence in the Chinese Capital Market

The Chinese capital market has experienced dramatic development over the past twenty years. We can read the stories in the candlestick charts of every rise and fall. By recalling past market performance, we are able to understand the theme that ran through the history of the A-shares.

A turn of peaks and dips
According to the large cycles that comprise both the bull and bear markets that the A-share market has experienced over the past twenty years, we can divide the history of Chinese A-share market into three stages.

The first stage was from 1990 to 1999, during which time the A-shares experienced the swapping of bull and bear markets four times. The Shanghai Composite Index started at 100 points, making 1,000 points its average value and 1,500 points its peak over those ten years. The Chinese A-share market had just gotten started during this period, and the swapping of bull and bear markets usually happened very quickly, resulting in rapid surges and sudden slumps.

The second stage was from 1999 to 2005. During these six years, the Chinese stock market, for the first and only time, underwent the smooth swap of a bull and bear market. The market climbed up to 2,245 points in two years and was then followed by a bear market that lasted four years. During this period, A-shares dipped to 1,000 points, peaked at 2,000 points, and had an average value of 1,500 points.

The third stage took place during the period from 2005 to 2009. The A-share market entered a super bull market since the second half of 2005 and the Shanghai Stock Index was up more than five times in only one year. The record of 6,124 points set on October 16th, 2007 has become a peak that the A-shares may find hard to surpass for a long time to come. Following the super bull market there inevitably came a super bear market, prompted in part by the global financial tsunami, and the index fell to its lowest point, 1,664, on October 28, 2008. So, the peak of the first stage and the average value of the second stage became the low point of the third stage.

Policy leads market development
China has been exploring ways to regulate the securities market in an effective way for the past twenty years. We can easily find the impact of policy directivs in each swap of the bull and bear markets.

Again, the history of the Chinese stock market can be divided into three stages. The first stages began in 1990 and ended in 1999. The stock market had just been introduced in China, and during that period China was undergoing an overhaul of its economic system. It had just said farewell to the planned economy and shifted to a market oriented economic model. So, it was very hard for the market to exercise self adjustment, and hence had to resort to policy support. During this period, every time the government came up with measures to adjust the market, it brought turbulent fluctuation.

During the second stage from 1999 to 2005, the existing trading systems and corporate governance mode were no longer able to handle the rapidly expanding securities market. Such inadequacy urged the relevant authorities to improve macro controls. During this period, shifts in major policies had a huge impact on the long-term market trend.

During the third stage from 2005 to 2010, a series of major improvements has been made in the securities market, such as the implementation of non-tradable shares reform, the release of the Securities Law and Corporate Law, the re-launch of IPOs, the unlocking of restricted shares, and the debut of index futures and the scheme of short selling and margin trading. Due to these reforms, A-share stock indices started to move more in line with economic fundamentals.