The rules governing the Chinese stock market

Linly Lin Jul 15, 2015

The modern Chinese stock market is 25 years old, and it’s having growing pains. The Communist Party acts like a hovering parent, steering the Shanghai and Shenzhen exchanges clear of life’s bumps and curves instead of letting the markets work out their own problems.

Technically the Chinese stock market is mostly closed to foreign investors and shouldn’t directly sway world markets, but global confidence has waned since mid-June, when the Shanghai Composite Index started a 30 percent nosedive.

Let’s look at some of the idiosyncratic rules governing the mysterious Chinese stock market:

Share tickers are serial numbers instead of letters.

If Alibaba were listed in Shanghai, its ticker would be a six-digit number, such as “300680” instead of BABA, its New York Stock Exchange symbol. There is no logical connection between the numbers assigned and company names.

Green means down; red, the favorite Chinese color, means up.

If the trading floor shows mostly red numbers, it means sighs of relief for the Chinese people.

Stock halting is common for Chinese public companies.

A company can halt its stock because of an imminent earnings report, an on-going business negotiation or an investigation by the regulatory commission. Halting can last for weeks or a month, unlike the U.S. exchanges, where halting is kept to less than an hour.

Chinese stocks are automatically halted for the rest of the trading day if there is a 10 percent change in price, up or down.

Therefore, bear or bull markets are restrained at that 10 percent change per day. Last week, about half of Chinese stocks were halted.

Shorting is only allowed for stock index futures in China.

In the past weeks, the Chinese government blamed short sellers for the plummeting markets and banned shorting activities.

Investors can take only one trading action per day, which is known as the T+1 Rule.

This is a nightmare for correcting trading mistakes and a technical block for short sellers.

Foreign investors cannot buy Chinese stocks freely.

China’s main market, the A-share market, is traded via Chinese yuan, or RMB. Foreign investors can only buy Chinese stocks through certified institutional investors, or they can take a detour and use Shanghai-Hong Kong Stock Connect, a mutual market-access program. Both ways are a bit clunky.

80 percent of Chinese stock buyers are mom-and-pop investors who bet their life savings hoping to make short-term gains from the stock markets.

Sean Lin (no relation to the reporter), an analyst at a major Chinese private equity firm, owns positions in both the Chinese and U.S. stock markets and knows their differences.

“Moms and pops prioritize the government’s guidance over companies’ performances,” he said via email from Guangdong, China. “They know even if Chinese companies don’t report any revenue, their stock prices will soar as long as there’s government policy support.

“There are much more frauds in the Chinese stock markets,” Lin added. “There have been few Chinese public companies delisting in the history, because the local governments want to keep jobs and won’t let the companies go bankrupt.”

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