How the collapse of China's volatile stock market looked from the inside

Bourse biopsy

How the collapse of China's volatile stock market looked from the inside


It is just after 9 am on Monday, June 29 on the campus of Fudan University in northeastern Shanghai. Stray cats stalk across well-manicured lawns near a reflecting pool; passing showers fall from mottled gray clouds; a pigeon coos from its perch atop a towering statue of Mao Zedong. And Wan Long has forgotten his umbrella.

The electrical engineering senior from Hubei province jogs over to meet a journalist and soon they arrive together at a 15th floor cafe overlooking the center of campus. Wan is a little wet, but otherwise very lucky—and he knows it. He cashed out of China’s stock market before it tanked last week, walking away with a total profit of RMB222,000 (US$35,700).

He does not yet realize he will get back into the market on Tuesday, or how fast and far share prices will fall on Thursday. And Friday.

In the aftermath of Chinese stock prices' free-fall last week, state media blamed malicious traders for “shorting” the country's stock market, suggesting that there had been some kind of concerted – possibly foreign – effort to destroy mainland shares' world-beating rally. “Shorting” a stock essentially means making a bet that its price will fall instead of rise during a certain period of time. But in mainland China, traders can't short specific stocks or sectors. They can only short broad swathes of the market. So long as the rally's continuation seemed certain, anyone would be a fool to bet that Chinese stocks – “A-shares” – wouldn't rise.

While blaming the shorting of Chinese stocks for the Thursday-Friday selloff may seem absurd on its face, it might also be true—but not because of any ill intent on the part of those who bet against the rally. Rather, by wagering that Chinese stock prices were more likely to fall than rise, these pessimistic traders may have sent a signal to others watching the market saying that they no longer believed the rally could continue. When enough of those orders came in, and enough of those watching got the signal, minor doubts could snowball into an avalanche of fear and panic. And because the entire rally had been driven by the belief that share prices would keep rising, when that confidence faltered far enough, prices had to collapse.

From the most casual traders to the most sophisticated, there is little attempt to deny the role of word of mouth in driving stock prices' movements in China. Indeed, the ability to take advantage of untrained traders' impulsiveness depends entirely on how early one gets word that this or that firm will do or announce something important which could trigger a buying spree (or selloff). It is really quite simple to buy low and sell high in China if one learns the right information before it becomes widely known, even if that information is nothing more than “sell now.”

That is why social connections make such a huge difference when investing in firms listed publicly in mainland China. And it is why a 21-year-old electrical engineering major can plausibly attempt to out-trade a full-time investor and stock-trading veteran. This is their story, told through the first three morning and last three afternoon sessions of the Shanghai Composite Index's most turbulent five days in decades.


The First Day

(Session opens: 4276)

Wan Long orders a watermelon smoothie and turns back toward the journalist. He has a boyish face framed by black-rimmed rectangular glasses and a lip dusted with whiskers. One long hair sprouts from beneath his chin—left untrimmed, for good luck.

But at 21 years old, Wan has worked hard to get here. He cleaned up on the national college entrance exam in Hubei province, and having just finished his senior year finals is glad for the chance to take it easy. Being out of the stock market is relaxing, and not just because he sidestepped financial catastrophe: “Having money in the stock market, it really affected me,” Wan says.

He’d been driven to distraction during class, amid lab experiments, and even on the job during his internship with the commerce department of the US Consulate. Sometimes it was hard to focus on fostering trade between China and the state of Illinois with his parents’ life savings on the line.

Wan had begun with his own savings of RMB20,000 and, after making a decent return, had been asked by his parents to manage about RMB2 million on their behalf. He lost about 10% of that sum early on, but quickly recovered it as the rally proper kicked off. He says he’d nearly doubled his money—“but then the profit disappeared.”

On the advice of an older student Wan walked away from the market in the middle of last week with a total of RMB2.2 million, well up from his starting point but down from a peak of RMB2.8 million. He says he plans to put the proceeds toward paying tuition at the economics school of Vanderbilt University.

Wan says he relied chiefly on two sources of information when investing: His own research and, perhaps more vitally, news and advice from his friends and fellow-members of Fudan University's many WeChat stock trading circles.

“I think one of the reasons my parents didn't earn money [on the stock market] is because they didn't communicate with others,” Wan says walking back to his dormitory in the southern half of campus. Wan had made sure to stay informed through ten-plus student groups on the social networking service, one cluster of many led by students from every department. It was one such leader who told Wan to get out last week.

In his dorm’s activity room – still festooned with Christmas decorations and a small plastic tree – Wan looks over his old portfolio. “Heavens,” he says on booting up his dilapidated smartphone, still missing its back cover. Both of his biggest plays are down around 10%, about as far as A-shares can fall before a firm’s stocks are frozen for the day. He wishes he’d sold sooner, but is glad he experienced both a rise and fall while working the market.

Some of his friends still have skin in the game and keep sending panicked messages out over WeChat. As the morning session nears its end Wan heads to the cafeteria. Sipping on a cup of tofu juice he watches as the Shanghai composite index closes the morning at around 4035 points, down 3.57%.

“Terrifying,” he notes in a quiet voice, eyes glued to the screen.

(Day closes: 4053)


The Second Day

(Session opens: 3998)

Fatty, it turns out, is not great around strangers.

Chen Pan, an investor at Great Wall Securities, apologizes for the great white fuzzball of a cat, which wrestles free of his grip and rushes across the hallway into the opposite bedroom.

“Please—please have a seat,” he says, motioning to the bed.

Birds chirp outside Chen’s seventh-floor window as he begins his workday trading from home. “I don’t expect things to change too much today,” he says, pointing to his desktop monitor and laptop, both displaying stock charts and trading figures.

Chen is 29 years old, has been trading for eight years, and lives with his parents—an existence neither embarrassing nor uncommon for someone living in a city where property prices can rank among the most expensive in the world. His room is small but neat; he is round-faced, bespectacled and soft-spoken. 

While he majored in e-commerce management at Shanghai Normal University, Chen got into finance because he found it fascinating: “Trading stocks isn’t just something simple,” he says. He’d only just begun as an investor when the China’s last big stock market crash began in 2007. Watching the market fall down around him has stuck with Chen.

“That left a deep impression on me,” he says. Looking around he saw that investors lacked expertise. Rather than do their due diligence they largely asked for tips from friends and family and followed whatever advice they got. “The disposition to follow is extraordinarily intense,” Chen says. He holds a dim view of the latest rally as well.

“The government wanted the current rally to help digest dead or illiquid assets,” he says. “You can see whenever the stock market went up, there was basically a big reduction of state-owned assets, or state-owned shares.” This is why he expects the government to step in and save the market should the rout continue.

"Suppose you are a first-time investor. When you find out that you can’t make money in the market, you’ll never come back again after you leave,” Chen says. “The government is afraid that once the market collapses, lots of retail investors will leave and not come back, even if the market goes up in the future.”

Chen is largely unfazed at 10:11 am when the index falls to 3903 points. He continues explaining that while mainland individual investors are immature, regulations are often harmful as well. Among a variety of issues, he singles out limitations on short selling as among the worst offenders.

Short selling a stock or index can serve to hedge risk by providing a means to profit even when the entire market is experiencing a downturn. But doing so requires traders to have at least RMB500,000 in their accounts. He says the requirement is unfair to people that invest in the stock market who aren't rich because it leaves those who often drive mainland stock rallies more exposed than their wealthier counterparts.

This and other unique features mean that “the difference between the domestic and foreign markets is truly huge,” Chen says. They simply don't operate in the same way or follow the same rules. Still, he figures surmounting such difficulties to make successful investments has its benefits: “If you can trade here, you can trade anywhere.”

Research can be key, and Chen says he spends 6-7 hours a day doing his homework. Economics and finance books line his wall, and for the journalist’s benefit he pulls out some of the financial textbooks he began studying on his own a few years back. His favorite book, though, is a biography of Jesse Lauriston Livermore, famous for shorting the US stock market just before the Great Depression struck in 1929.

Still, he adds, “sometimes it doesn’t matter how much information you have.” Retail investors often seek out "inside information," but he says that such claims are most often bunk—either originating online from a publicly accessible news story or having simply been made up. Sometimes personal connections can prove most key to finding out vital news ahead of time, but even that can’t guarantee investment success.

He and other traders at institutional investment firms usually keep an eye out for new policy drives - like the new One Belt, One Road infrastructure initiative - and reform announcements concerning restructuring of state-owned assets, as with recent mergers of state nuclear and rail companies. Before last week’s fall his portfolio was up 150%. (Now it’s only up 120%.) Most of his friends are up by more than 100% as well. None think the market has peaked, either.

“I’m a very, very, very, very conservative trader,” he notes, though he later confesses, “I’m hoping for miracle this afternoon.” He laughs. “There could be one—and then the next morning there will be a huge selloff.” This morning's session is not quite so cruel, closing up slightly at 4052 points.

(Day closes: 4277)



The Third Day

(Session opens: 4182)

Mr. Wang waits a little while before introducing himself.

On the second floor of the Nanjing Securities Trading Hall in central Shanghai, Ms. Song, a retiree investor, explains how she made so much money from China’s stock market in the late 90s that in 2000 she was able to afford a home not too far from where the journalist and his colleague are now standing. Now she just invests casually, and only in the morning session.

Most afternoons she goes home and reads a book instead of staying to trade. After all, it’s only a short walk. Seeing that matter settled, Mr. Wang inserts himself into the conversation.

“Most people invest based on their feelings,” says the short, spritely gentleman of 65 years. A native of Shanghai, he bears an uncanny resemblance to the comedian and director Mel Brooks. He always carries a thermos with him, atop which he holds a tiny glass tea cup steady with the palm of one hand. He swings his other about with wild abandon whenever he speaks. Which he will do, at great length, in about an hour.

First there is Mr. Xu to speak with.

Today is the first day of Mr. Xu’s retirement, whether he likes it or not. Mr. Xu worked as a mechanic at a government-owned factory in town until 2003, when the government allowed it and countless other small state-owned enterprises (SOEs) to go under—though the largest would eventually list on the Shanghai Stock Exchange. That may be one reason why he says he's not wild about the idea of state firms granting employees stock options.

Having been let go, Mr. Xu was forced to seek work as a janitor for a movie theater until he reached retirement age, and his hands are calloused and raw from the work. Held in one of them is a smart phone used to track his investments.

He says they amount to the entirety of his life savings: RMB30,000. It was RMB50,000 before last week’s dip. He’s still investing based on family and friends’ advice. “They speak and I buy,” he says. It is 10:32 am and the market is riding high at 4297 points.

In the stairwell outside the noisome second-floor trading hall Mr. Wang gives his own life story, at once similar and entirely different. He was ordered out of Shanghai in 1970 to work as a steel mill manager in the inland province of Jiangxi.

“This was back when Chairman Mao was alive,” he says, “and we thought we might be going to war with the Soviet Union!” But battle was not in the cards for Mr. Wang, who would spend three full decades in the city of Xinyu. (“Very beautiful.”) He found a wife, had a child, and then came home to Shanghai – and his parents – 15 years ago when he was let go during the massive layoffs that accompanied SOE reform in the late 90s.

Fresh from the bosom of the state he went full-time with what was once only a side gig: Stock trading. Having traded since the early 90s, Mr. Wang says he’s learned China’s market was and remains neither regulated nor predictable.

“You can’t control this market,” he says with another grand wave. He says only short-term investors can make money on mainland markets thanks to sub-par regulations that make longer-term investment “like riding an elevator”—all ups and downs.

Indeed, Mr. Wang says he lives just an elevator ride from where he stands, in a second home above what is now the stock hall that he bought with his investment earnings after the steel mill let him go. He heads to grab a bite as the index closes at 4260 points.


The Third Day

After the morning session ends Mr. Wang heads up to his room some floors above for a modest lunch. He makes himself cold noodles and rice porridge - same as always, he says - then comes back down for the afternoon session. The journalist neglects to ask whether he took the elevator or the stairs.


The Third Day

(Session opens: 4249)

Back downstairs, Mr. Wang reveals that everyone in his family is trading, including his daughter. This time around he has invested RMB10,000. At the peak his stocks were worth RMB17,000 before they fell. Still, at RMB13,000 now he’s doing alright. Patrons at the hall can also go over to the counter to get a loan of RMB10,000 should they need some extra funds for a bit of margin trading.

While the market is flawed, he says, it is still a better place to make money for many ordinary people than most other alternatives in China. But he admits it would be faster to trade up in his home compared to the clunky consoles here on the second floor. The connection is much faster.

“But Chinese people like to gather,” Mr. Wang says. And besides, at the trading hall they can turn to someone for help when a computer proves uncooperative. He has clearly tried every method of investing, and holds a special distaste for swapping shares via smartphone. It’s not the technology. It’s the connection.

“3G, 4G? bah! Too slow,” he says. The connection can get pretty spotty, and during peak hours heavy traffic can bog down wireless networks even more, especially during the trading day. That is still probably better than the stock hall’s main LED-lit boards, which cycle through a range of stocks in six-second shifts. Unlike in the western world, red (color of China and the party) indicates that share prices have gone up, while green means they’ve fallen.

As Mr. Wang explains to a novice what kind of information the monitor of a trading console can display, most of the numbers on the screen begin to switch from red to green. He has noticed, and predicts the index might go as low as 3800 tomorrow. Mr. Wang is unruffled. Ms. Song has gone home to read. Mr. Xu is nowhere to be found.

(Day closes: 4052)



The Fourth Day

(Session opens: 4249)

It is 1 pm and Fatty won’t come out from under Chen Pan’s desk. He drags her out and she quickly frees herself and bolts for the door. He notes the policy announcements from last evening appear to have had little effect on trading for the day so far: Things seem to have gotten even more volatile.

Online there isn’t much in the way of serious explanation as to why, though some have decided to blame malevolent foreign investors short-selling mainland stocks. Chen says for microeconomic developments in China he usually goes to and The former provides some relatively useful news; information from the latter isn’t very dependable, but there is plenty of it. For the macro picture he typically goes to the Chinese-language version of The Wall Street Journal.

None seem to fully explain the drop's intensity: By 1:46 pm the index is down at about 3920 points, and in addition to red and green figures, trading volume figures are starting to show up in purple instead of the regular yellow.

Chen explains that purple is reserved for particularly large trades shortly before a few more purple figures start popping up on screen. And a few more. More. He wonders out loud how the government might slow the rout—halting listings or... more purple numbers. “Terrifying,” he says.

At 2:07 pm the index is down to 3853 points. Chen sighs and fiddles nervously with the cover of his iPad. At 2:12 pm his father brings in a plate of watermelon slices. At 2:14 pm the index has fallen to 3796 points. Sparrows tweet outside the bedroom window as Chen watches in silence. At times purple seems close to covering the screen. He suspects many of these are automated trades, carried out by computers.

Even if they are, nobody has any idea what has traders so spooked—not Chen, not any of his friends, and least of all the journalist. At 2:56 pm the index has swooped back up to 3909, but Chen's mind is made up: He’ll wait for tomorrow’s opening trades. “If there’s a bad open tomorrow...”

(Day closes: 3912)


The Fifth Day

(Session opens: 3785)

Throngs of unseen cicadas chorus in the trees of Fudan University. Flower sellers gather at strategic intersections, eyes peeled for any proud parents passing by. Capped and gowned graduate students make their way south toward the campus’s stadium to get their diplomas, but Wan Long already got his this morning.

He still needs to take a few pictures, though.

As he and the journalist make their way toward the center of campus, Wan reveals that he got back into the market on Tuesday. The journalist’s arched eyebrows prompt quick clarification: Wan only put in 5% of his money, and got out on Wednesday morning before the fall that afternoon on the advice of another expert.

They reach the center of campus to meet up with Wan’s friends from their branch of a multinational university organization that, in its Fudan incarnation, sends students to inland provinces to teach teachers how to use key tech and programs and speak Mandarin. They also record audiobooks for blind children. On the shelves of their recording room where Wan's friends are waiting sit volumes including Charlotte’s Web and The Little Prince.

The group sets off for the main campus plaza for photos with Wan intermittently checking the plummeting index on his phone, which is quickly running out of power. Many of his friends have refused to cash out even after losing all their profits and then some.

“Most of them are at a maybe 30 or 40% loss,” he says. “They say it’s hard for them to look at the screen.”

Rumors are flying through his WeChat circles claiming that the government has ordered state-run securities firms to plough money into the market to stave off financial crisis. For now the most immediate crisis is how the group will pose together in their farewell pictures. The entire process takes half an hour before they break up... to take pictures in groups of two or three for another ten minutes.

Finally Wan breaks away and makes a beeline for the recording room. He can’t check the index—his phone's battery is dead. With ten minutes left he plugs it in only to find there’s no WiFi signal in the room. At eight minutes to go he turns on the computer to find it can’t connect to the Internet. He runs outside to ask the hall’s custodian to open another room.

She shuffles, slowly, toward the relevant doorway. And slo-o-owly turns the key.

Finally he’s inside, plugged in and catches a signal just in time to see the index tick down its final few notches, from -4.44% to -5.77%. It has dropped about 225 points in the space of one day. For a moment the only sound in the room is the whine of a mosquito as it flies by the journalist's ear. Wan begins to worry about whether a financial crisis could devalue the renminbi, undermining his earnings and making tuition in the US more expensive. He pulls up WeChat, where dark humor is being used to cope with harsh reality.

“The weekend is here!” notes one friend in a tone of playful despair. “At last: It can’t fall any further.”

(Day closes: 3686)

Author: Hudson Lockett (@KangHexin)

Research: Yuan Xin (@yyyuanxin)