China's Stock Market: Understanding Its Boom-and-Bust Cycles

Using the context of a private-bank chief economist preparing for a client call just as the Shanghai Stock Exchange Composite Index (SCI) reached a 29-month high on July 7, 2020, this case places students in a position to prepare an outlook on the prospects for investment in China. It also enables the comparison of China to various potential investment geographies, such as the United States and other financial markets around the globe.

The material covers the development of China's financial system from the 1980s to the 2020s, paying particular attention to the banking system, equity and debt markets, and the structure of household-level financial assets. Special emphasis is placed on the most recent boom-and-bust cycles of Chinese equities, helping students to understand the factors suggesting additional equity growth and retraction. The case applies Robert Shiller's standard analysis for speculative bubbles to China's equity market.

China is the world's second-largest economy and equity market, but its stock market is still underdeveloped relative to other investment channels, as evidenced in the structure of China's aggregate financial assets and the composition of household wealth. Additionally, the government response and interventions play a large role. How would COVID-19 affect the investment opportunities in China, and how did China's markets compare to markets in the rest of the world? Most importantly, was this the time for American investors to invest in China?

This case has been taught in a second-year MBA elective on China in the global economy, in a module examining progress and challenges in Chinese markets. It has also been successfully taught in a course on emerging markets, in a module examining global investments. The material allows for an examination of financial markets in China in particular, and stock market conditions in emerging markets more generally.