Stock Markets, FDI and Challenges of Sustainability
Advances in Chinese Economic Studies series
Edited by Lilai Xu
Chapter 2: Condition Constraints and Player Behavior in China’s Stock Market
Huaiqing Zhu and Changfeng Pan INTRODUCTION China has undergone a process of reform of its non-tradeable shares, but stock market observers are still puzzled by the deviation of the share price from broader macroeconomic trends. Financial economics assumes that the stock market is a barometer of national economic performance. From a long-term perspective, trends in share prices reflect trends in a country’s economy. When an economy moves through the four stages of an economic cycle – recession, recovery, growth and decline – the stock market will simultaneously experience a similar cycle. The reason why the performance of the stock market is parallel to the performance of the national economy is largely due to the fact that a stronger economy reflected by listed companies’ greater profitability, households’ higher income and investors’ positive expectation will usually push up the stock market, and vice versa. In China, however, a very unique phenomenon has been witnessed of severe deviation of stock prices from the macro economy (Pan, 2006). Focusing on the evidence captured in the first half of the 2000s, this chapter discusses the condition constraints placed on the stock market and market players’ behavior under such constraints. The chapter seeks to provide insights into the situation in China, and suggests that, if those constraints cannot be removed and if there are no significant changes in the behavior of players, the Chinese stock market (a government policy-oriented market) is most likely to remain much the same in the foreseeable future. CONDITION CONSTRAINTS IN CHINA’S STOCK MARKET...
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