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I'm Stephen Carol 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 Sea signed three hundred actually poise for its best daily rally in sixteen years.
Hong Kong shares jumping almost six percent. We have developers, in particular doing gangbusters right now.
Cheap valuation is never enough to turn around a market. But when you have valuation and catalysts, which is taking place in the form of stimulus hopes, you see this incredible momentum, which is what we're leni into.
Investors in Chinese equities are used to feeling like they're on a roller coaster. The late September Ali saw the biggest gain since two thousand and eight, 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 eight Equities, leanting
two is with me for more the hunting. 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 ten trillion dollars, and if you count Hong Kong, which is about six trillion dollars, the combined market cap is about sixteen trillion dollars 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, compared 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 seventy percent 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 US, 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 that's right. Bring 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 they say 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 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 ten day volatility for the CSI three hundred, which is a benchmark for on shore
China stock market. We're looking at between thirty to fifty sort of points for the VOW index over the past five years or so, and that is double that of the S and P five hundred.
You mentioned. The onshore exchange is there as well on Hong Kong. How different is Hong Kong to those mainland exchanges.
Yeah, it's Hong Kong. The unique thing about Hong Kong is is 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. A majority of Chinese stock market owners are still very much local investors. We're talking about more than ninety percent.
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 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 time 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 waitings are the soees, the state owned enterprises, big banks, big railway companies, construction companies, and there is also a few very big private enterprises such as Quecho Maltai, and also the up and coming Cattle which is the 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 elopments on the markets in China?
I would say yes. Another element I want to bring out is the high frequency trading companies, and then we're seeing a good amount of those companies some mushrooming in China on shore China over the last few years, and that has actually contributed to the higher volatility on shore and in Hong Kong. I think just because of the prolonged slump in Hong Kong's 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. That 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 on shore and offshore would make the market a lot more volatile going forward.
Thanks to our managing editor for Asian Equities Leanting Too. For more explanations like this from our team of twenty seven hundred journalists and analysts around the world, search for Quick Take on the Bloomberg website or Bloomberg Business App. I'm Stephen Carol. This is Here's why. I'll be back next week with more. Thanks for listening.