Here's Why China's Stock Markets Just Work Differently
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Bloomberg Audio Studios. Podcasts, radio, news. I'm Stephen Carroll and this is Here's Why, where we take one news story and explain it in just a few minutes with our experts here at Bloomberg. It's been a wild time on Chinese stock markets. The CSI 300 actually poised for its best daily rally in 16 years. Hong Kong shares jumping almost 6%. We have developers in particular...

Investors in Chinese equities are used to feeling like they're on a roller coaster. The late September rally saw the biggest gain since 2008, but it came after months of declines.

A quick search of Bloomberg stories about China's markets turns up phrases like harrowing losses, wild swings and even stocks euphoria. So here's why China's stock markets just work differently.

Our managing editor for Asia Equities, Lian Ting Tu, is with me for more. Lian Ting, firstly, for context, from a global perspective, how big are the Chinese stock markets? Chinese stock market is actually the second largest in the world, behind the US. In terms of market cap, we're talking about $10 trillion. And if you count Hong Kong, which is about $6 trillion, the combined market cap is about $16 trillion. And that is about a quarter of the market

cap size in the US. So still relatively small compared with the US, but it's quite a sizable market. How do markets in China, though, compare to stock markets elsewhere in terms of investors or liquidity? Yeah, China has its own unique characteristics. The market is relatively young compared with the likes of the US and some other developed markets.

it is dominated by retail traders. We're talking about retail turnover accounting for about 70% of total turnover in China. And in developed markets like in the US, we're looking at very professional investor-dominated trading. So because of that, Chinese markets are actually a bit more irrational, a bit more

sort of volatile. And also, you know, the government has rolled out a lot of intervention and market-related reforms and different kind of crackdowns over the years. So that has really been the driving force on the stock market versus the developed markets like the U.S., which is a little bit more reflective of the economic fundamentals.

I mean, you could say more volatile and more exciting, depending on what you're getting out of covering these markets as well. Give us sort of a scale idea of the differences in volatility. So you've explained some of the foundations of why this is, but what makes the markets more volatile than others that you've mentioned?

The retail traders actually account for a big chunk of stock trading in China. And their trading is usually based on some kind of sentiment-driven decision-making, or they hear something from social media, or from some kind of influencers. So a lot of

the decision-making is very detached from the fundamentals of companies you know earnings and also just a sheer number of retail traders out there in China and they all go in usually towards the same direction and that's also making the market very momentum driven and that all

contributes to the kind of high volatility. And if you look at the metrics, 10-day volatility for the CSI 300, which is a benchmark for onshore China stock market, we're looking at between 30 to 50 sort of points for the vol index over the past five years or so. And that is double that of the S&P 500. You mentioned the onshore exchanges there as well and Hong Kong. How different is Hong Kong to those mainland exchanges?

Yes, Hong Kong, the unique thing about Hong Kong is it's still very much an open market. Everybody can come and go, they can buy, they can sell, they can do whatever they want. And the onshore market still has a lot of capital control. So there is stock.

connect between Hong Kong and China, but that is still a very small window for foreign investors going into China. Majority of Chinese stock market owners are still very much local investors. We're talking about more than 90%. But for the Hong Kong market, lots of trading is actually driven by global funds. So it is quite a free capital market, which also means the Hong Kong market can be sometimes a lot more volatile than the onshore market.

Even more exciting. When we're looking at these markets, we're often tracking what announcements are coming, particularly in recent times, in terms of stimulus. How useful a proxy are the Chinese stock markets for the Chinese economy?

Yeah, overall, I would say the Chinese onshore stock market is rather reflective of the underlying economy just by looking at the members, the composition. The companies with big weightings are the SOEs, the state-owned enterprises, big banks.

banks, big railway companies, construction companies, and there's also a few very big private enterprises such as Kui Chow Mao Tai and also the up-and-coming CATL, which is a global leading battery maker. So I would say it's a good reflection of the economy, but

Because of the kind of momentum-driven nature of stock trading in China, sometimes the performance of the market can be rather detached from the underlying economy. Does that mean that we should expect to see this volatility continue as we monitor the developments on the markets in China?

I would say yes. Another element I want to bring out is the high-frequency trading companies. And we're seeing a good amount of those companies mushrooming in China, onshore China, over the last few years. And that has actually contributed significantly

to the higher volatility onshore. And in Hong Kong, I think just because of the prolonged slump in Hong Kong stock market, a lot of the traders right now are fast money hedge funds, and they also do a lot of high frequency trading, which means they come and go within seconds.

can make the market a lot more volatile as well. So I'd say, yes, the enthusiasm and also the kind of composition of a trader base right now onshore and offshore would make the market a lot more volatile going forward. Thanks to our managing editor for Asian Equities, Lian Ting Tu. For more explanations like this from our team of 2,700 journalists and analysts around the world, search for Quick Take on the Bloomberg website or Bloomberg Business app.

I'm Stephen Carroll. This is Here's Why. I'll be back next week with more. Thanks for listening.

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