Chinese Stocks: What’s Behind the Great Market Tumble?

The Chinese stock market rout is raising global worries. Since mid-June, the Shanghai Composite Index has fallen by about a third, and the value of the renminbi has also tumbled. Today’s troubles stem from a stimulus program — initiated by the Chinese government to shield China from the 2008 financial crisis — that pumped massive amounts of liquidity into the system. Many unsophisticated small investors jumped into the stock market, encouraged by the government. But stock valuations are turning out to be too lofty to be justified by fundamentals, especially as the Chinese economy cools down and cracks began to show. Investors — many borrowing money to invest — began to pull out, and a stampede for the exits began.

University of Pennsylvania law professor Jacques deLisle, director of Penn’s Center for East Asian Studies, says the Chinese government has taken both a carrot and stick strategy — its central bank has cut interest rates, but regulators are also investigating speculators and threatening to prosecute stock rumor mongers. It has also suspended IPOs. Ann Lee, adjunct professor of economics and finance at New York University and a U.S.-China economic relationship expert, adds that many small investors are on margin calls, which is exacerbating the sell-off. Meanwhile, it remains to be seen whether the Chinese government’s strategy will eventually work. DeLisle and Lee discussed the implications of the Chinese stock market crash on the Knowledge@Wharton show on Wharton Business Radio on SiriusXM channel 111. (Listen to the podcast at the top of this page.)

An edited transcript will be posted soon.