China's Stock Market Crash of 2015: Examining Algorithmic Trading's Role in the Volatility

By :- Lebaka Harika

China's share market started to fluctuate in early July 2014. The Shanghai Composite Index surged by 152% in less than a year, from2050to5166pointsbyJune12,2015, as Chinese stock prices rose nearly unabatedly. Millions of middle-class and working-class Chinese families placed substantial bets on stocks, frequently using borrowed funds, which helped the market growevenmore.

ButonJune15,themarketabruptlystarted to decline, and in just 17 trading days, the indexfellby32%,from5166to3507points.

A second, more severe downturn began on August 18 after a brief period of volatility, during which the Shanghai market dropped byover27%injustseventradingdays.

Investors faced severe losses, losing on average more than $15,000 each. Two hundred thirty-eight thousand eight hundred people invested more than 5 million RMB (about 0.77 million US dollars) in the Chinese stock markets in May 2015; at the end of August, that number had fallento125,500.BetweenJulyandAugust, the number of accounts holding between 15,000 and 77,000 US dollars decreased by 869,600andover700,000.

Due to the stock market crash, a general market downturn swiftly expanded to the fund sector. First, the value of those funds' equities fell, lowering their net asset value. The CSMAR database shows that from May toAugust2015,theaveragenetassetvalue of equity and hybrid funds decreased by over 19%, and 25% of the funds saw value lossesofmorethan44%.

Second, investors largely withdrew their money because of poor fund performance. Due to these redemptions, stock prices continued to decline due to fund managers having to sell equities to manage their liquidityrisk.

During this catastrophe, the Shanghai and Shenzhen Stock Exchanges lost a combined market value of about 5 trillion US dollars.

Significant financial losses were incurred due to the stock market crash and the accompanying fund redemptions, which promptedmanyfundinvestorstoaltertheir preferredinvestingmethods.

BlackMondayandTuesday

Shanghai's main share index lost 8.49% of its value on August 24. As a result, the global stock markets suffered enormous losses, and some foreign pundits dubbed that day "Black Monday." On August 25, therewerecomparablelossesofmorethan 7%, which led some observers to refer to thedayas"BlackTuesday."

What caused the stock market crash inChina?

The sudden depreciation of the yuan on August11startedaseriesofeventsthatare the immediate cause of all this. Since then, globalstockpriceshavefallenbymorethan $5 trillion. Disappointing statistics from Friday that revealed a dramatic slowdown in industrial activity in China and the Chinesegovernment'sinabilitytoannounce anysignificantnewmarket actionstodayto support equities prices appear to be the leading causes of today's Chinese market collapse.

Other emerging countries, particularly those whose growth models depend on Chinese demand for industrial and other commodities, have come under pressure due to a deteriorating forecast for Chinese growth and a decline in the value of the Chineseyuan.

The Fed has been prepping the global economy for the first interest rate increase in nearly a decade in September and has also put pressure on emerging markets. A stronger currency, fewer capital inflows to large emerging economies, and more challenging loan repayment terms for businesses and governments with dollardenominated debt all affect America's tightermonetarypolicy.

In other words, the global economy is undergoing a massive transformation as China strives to rebalance and prosperous economies try to normalize their policies. Markets are trembling due to the difficulty authoritieshavemanagingthatchange.

The China Purchasing Managers' Index (PMI), a closely followed indicator of national manufacturing activity, was reported to have fallen to 51.5 in August 2015byCaixinMedia.Thismarkedthestart of a slump that persisted until December 2015, with the PMI dropping below 50, which denotes a slowdown. The financial information organization creates PMIs, which are economic indicators, from monthly polls of companies' purchasing managers.

Why worry about the China Stock MarketCrash?

Givenitsbreath-takingriseintheyear'sfirst half, a decline in the Chinese stock market seemed unlikely. To put its drop in perspective, remember that the Shanghai Composite is still up 43% from a year ago. At least in the medium term, the ripple effectsofmarketturbulenceshouldbekept toaminimum.

appears improbable in the interim. Asian governments are much more equipped to handle this economic climate change. Currency pegs that caused problems in the late 1990s have mostly been replaced with floating-rate systems, and financial institutions are now better run and more stableoverall.Neitherdoesafinancialcrisis comparabletothatof2008seemimminent. More robust than it was just before the financial crisis, the world's banking system is now. The mispricing of entire classes of risk assets and the interdependence of weak financial institutions, both of which contributed to the panic of 2008, are no longer present. The period of galloping emerging-market expansion that started around 2000 may finally end due to the currentglobalmarketmeltdown.

Shares represent a relatively small portion of Chinese wealth.Morereal estate is held, whose market has stabilized recently. The Chinese government still has room to make some of its most potent measures, such as lowering bank reserve requirements. A repeat of the Asian financial crisis 1997

The emerging-market growth that was fuelled by Chinese growth, low-interest rates, and surging commodity prices has been yanked away, leaving the developing world to deal with the aftereffects, as evidenced by the falling emerging-market indices and currencies, from Brazil to Turkey and Kazakhstan.Prosperous economiesaretheonlysource of economic growth now that emerging markets are struggling and China's rebalance still incomplete.Thatscenarioisunsettling