1.0.

Introduction

China’s stock market is knows to be sharply weakened during first and half quarter 2015 despite
investors’ lack of belief in global confidence regarding country’s slowing economy (Allen, 2015)
which makes china’s stock price soared about 150% in the past regarding the warnings that
shares were overvalued and resulting on shares prices in china hit a seven-year low and the
China’s government’s shock move to devalue its currency on august to intensify worries about
the world’s second-largest economy.

This economic breakdown in China is known to affect the shares around the world which made
about £74billion was wiped off the value of the FTSE 100 and on Wall Street, the Dow Jones
Industrial Average slumped by a record of more than 1,000 points at one stage said Allen (2015).

The decreasing stock value also affected commodities such as crude oil and copper which
tumbled to multi-year lows as investors frightened over signs of the demand in raw materials.

2.0.The causes of China’s Stock Market decline

2.1.Financial Aspect
There are some economic aspects regarding the crash in China’s Stock Market which
are:
2.1.1. Affection from Currency Value
The 2 percents devaluation in the Yuan which has been done by the
government to increase its exports (Putra, 2015) freaked out some
investors especially companies which operate in the luxury and mining
industries because the decreasing in value of the currency will lead to the
decreasing in buyer’s purchasing power in the country and it is known that
China is one of the biggest target market for companies around the world.
The decreasing in purchasing power then will reflects on the lessen trust
from the investors that consumers in China could be depend on.
2.1.2. Affection from Economic Growth
 The slower economic growth in China which is likely to be the result of
slowing manufacturing activity balanced by a more sustainable
composition of internal growth in the recent year (Holodny, 2015) looking
from China’s GDP which currently growth stands around 7% from 10% in
previous years also one of the reason the investors pulled out their money
because the slow growth might impact on the purchasing power in China
which affect companies profit and growing investors speculation about
ability of company sustaining their business in the country.
2.1.3. Cut on the Interest Rate
The effort from The People’s Bank of China by lowering their lending rate
deposit by 4.6% and 1.75%, respectively (Sheffield, 2015) with intentions
to slower the market crash resulting even more global market rout because
of the early move of decreasing interest rates which has been conducted
four times in from November through July giving speculation of unstable
market in China.

2.2.Non Financial Aspect

2.2.1. Government Intervention
The intervention from China government by doing devaluation and cutting
their interest rate provoke the assumption of unstable market in China and
giving investor imagination about how china stock market was risky as
well as bringing speculations on the country’s growth and their ability to
sustain the development in the country which makes investors doubting
about putting money in.
2.2.2. Media Intervention
A story from Wang Xiaolu written for Caijing, a financial and business
newspaper in China on July 20 is believed to spread false information
about securities and futures trading in the country (Tiezzi, 2015) which
gave the panics and disorder at stock market in China since investors are
influenced and became seriously undermined the market confidence and
rush over to put out their money due to the speculations on the economic
 condition for stock trading and global market in the country. Media
intervention is indicated by Shiller (2000) as indirect factor that inspire
people and enhance mood changes for the stock assessment.
2.2.3. Speculative Bubble
In the perspective of Shiller (2015), the irrational exuberance in the
individual which considered as a psychological basis of a speculative
bubble situation could drives price spurs investors enthusiasm and being
spread by contagion from person to person which able to amplify stories
that might justify the price increase and giving market a larger class of
investors who are drawn to partly envy of others successes and partly
through a gambler's excitement. This contagious situation reflected in the
China’s stock market especially due to the speculation and media
intervention which resulting the market crushed badly within short time.
2.3.The Impact on Companies
In the local area, China stock broke down hurts the local company since they are
losing lots of money and they have to find ways to recover their business and gain the
investor’s trusts over again to stopping them from stumbling on the business.
From the international area, the negative thing on china stock price falls is that it has
pushed down some currencies and value of commodities such as crude oil which
could complicates on the companies all around the world especially the companies
working on the commodities since they do lots of exports and currency swaps while
on the positive side, the international company now could steal the ex-investors from
China to invest on them which probably will bring some more financing benefit for
the international companies and the countries outside china as well.

3.0.The alternatives to reduce the impact on market crashed in China

Looking at the stock market crashed in China, Financial management is required to reduce
the impact for the company such as doing the assets allocation to reduce the short-term
impact by putting company’s money into a spread of shares, bonds, cash, property and
specialist investments could help because when stock markets fall or property prices crash, a
diversified portfolio could give the company some security on their assets and reduce the
fallout impact (Norton, 2015). After that, company has to solve their value stock and increase
their assets to sustain their business by doing some alternatives below:

1. Stock Repurchase (or Stock Buy-Back)

Looking at the reason on the lack of trust of investors to invest in companies in China,
Company could do stock repurchase which could help to boost the share price since by
doing the buy-back on the stock, company could increase the demand for the stock as
well as its price due to the inclining demand on the shares. By doing this, companies
could convince the investors that the stock is reliable and increase the investors believes
that its future performance will improve in the future.

2. Financing the company

Due to the psychological effect on how investors buying the stocks, company could raise
their debt which able to help improving the overall risk of the firm provided that the firm
has not reached the point of financial distress such as their unreliable and unable to pay
short-term debts. In addition, depends on the amount of debt raised and how it will be
used it may have a positive effect on the stock price but company has to properly pick the
types of debt they would choose because it may gives indirect effect on the stock price of
the firm based on debtor’s timely returns and flexibility.

Other than that, selling preferred stocks can also be a good alternative as a way to finance
a company as an equity measure which features some characteristics of debt securities
and reflect more direct performance to company financial condition (Miller,2007) even
though company has also consider the type of preferred stock that appropriate to sell in
the china economic downwards such as convertible and cumulative preferred shares with
fixed and adjustable dividend rates and voting. By doing this way, common stock could
also benefit on the long-term run of the company when the financial problem in the
company are stabilized.

3. Organizational restructuring
By evaluating, valuing and prioritizing the main assets of the company, company could
identify the business unit or a subunit that performs well than the overall performance of
 the firm and then consider in growing the unit by funds developing or sell that business to
another firm which could reflect on investors to company’s willingness to grow and
potentially open for changes as it is helpful to attract and challenge the investors and
bring higher interest in buying the company’s stock.

4.0.China’s stock market evaluation on the Efficient Market Hypothesis

First of all, efficient market hypothesis is a hypothesis which assets prices fully reflect by all
available information which can be adjusted to and fully incorporate with new information.
Fama (1970) identified three types of efficient markets which are the weak form, the semi-
strong and the strong-form efficient market whereas in a weak-form efficient market, value
of shares could reflect on the basic information contained in trading market such as past
prices and trading volume identifying that the future stock prices cannot be anticipated by
using past stock price information which could lead to random behavior of prices of stock
and has no identifiable moving pattern which makes investors cannot generate abnormal
returns by using technical analysis, that makes behavioral finance analysis is a better way to
identify the market.
Looking at the data from October 2014 through the end of September 2015 on the figure
above, the projection of Chinese stock markets shows tremendous changes during this period.
Therefore, the weak-form efficient market hypothesis is identified in the china stock market
based on the knowledge of behavioral finance. The assumption on the weak-form of market
hypothesis goes along with the general knowledge about emerging stock market such as
Chinese Stock Market whereas emulation by government and stakeholders in emerging
markets reflect the role of the stock market in economic development and cannot be
overemphasized (Nwobu, 2015) is known to be not informationally efficient as the stock
market in the developed countries and stock market in the country possesses unique features
like shares segmentations and controlled by government that goes along with the country’s
political environments that likely to causes market inefficiency which makes stock market in
China is seen to be instructive in many ways since it could demonstrated the power of
investor’s sentiment of information and the stock market mechanics need for caution on the
type and tone of information published about the market (Nwobu, 2015).
On the one hand, the market behavior which rely on destructive rumors which causes fertilize
crisis because of the disinformation, opacity of the information, and misinformation as well
as mismanagement which could creates stock market gyration is very dangerous because it
could also unveiled the importance and value China stock market behavior regarding its
wealth creation and economic development. The next issue of China market behavior on its
margin loan/ trading which offer leverage to investors to play the market is also considered to
be frustrating since it encourages bubble as was the case in China since the margin loans can
complicate things for the investor and causes panic trading because when the margin trader
unable to meet margin calls and terrible things happen on the market, they are likely to
record huge loss and still have interest to worry about and thereby caught in a debt trap.
On the other hand, the panic and speculative trading which become a norm and gives market
sentiment could complicates to excessive emotional trading could drive share values to their
bottom lower of market fundamental and that, in any case, is identified to be a typical of the
cyclical nature on the stock markets which other trader could squeeze good thing about the
down times in the stock market as a good opportunities for adepts to take position for the
next market run and make cool millions in the stock market without breaking a sweat since
 they got price on the bottom low but continued effort should be made to ensure long and
stable development of the capital market.

5.0.Conclusion
The downside on the China’s stock market in recent period were identified to be the cause of
monetary factors such as the economic growth of the country, interest rates, and exchange
rates that goes along with the uneconomic factors such as government regulations and the
investors behavior which affected local and international companies in many ways. Behavior
finance is known to be the appropriate way in indentifying the situations and the Financial
Management could be very helpful to lessen the impact of the downwards.

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