By Michael Ide. Originally published at ValueWalk.
What Chinese equities are still being traded are finally on the mend in what must be the most openly manufactured stock market rally on record. The Shanghai Stock Exchange Composite Index is up 5.76%, but it would be extremely optimistic to assume that we’ve seen the last either of Chinese equity fragility or government intervention.
While we’re waiting for the next blowup, the Yale School of Management Shanghai Stock Exchange Project has pulled together price data for the previous iteration of the Shanghai Stock Exchange, formed by foreign businessmen and brought to an end by the Japanese army, from 1870 – 1940 (H/T StreetEye).
Shanghai Stock Exchange Project pulls data together for future research
The researchers got their data from the English-language newspaper The North China Herald, which in turn got its information from a brokerage called J.P. Bisset & Co. The paper listed transaction prices. Bid-ask spreads, and volumes every week, along with information on dividend payments, stock splits and issuances.
If the project seems like a curiosity, remember that one of the difficulties of studying booms and busts is that they don’t happen very often so academics have to pull together huge datasets to find meaningful results. Building these databases (Yale is doing similar work on other exchanges) and making them freely available helps economists tackle difficult topics.
Inflation in the Shanghai yuan-denominated price index
When you look at the Shanghai index (the Yale researchers calculate both equal-weight and value-weight indices), one thing that jumps out at you is the difference between the dollar-denominated and yuan-denominated price movements. In dollar terms the market was falling as China, and the Chinese economy, were being wrecked by the Second Sino-Japanese War that raged from 1937 – 1945 (which of course was part of World War II), but if you only looked at the prices in Yuan you might think that the market was on a tear. The difference, as you might guess, was due to the devaluation of the Yuan while the Chinese government (the one that later fled to Taiwan) printed money.
“When war with Japan broke out in 1937, the total quantity of money in circulation (currency and demand deposits) was 3.6 billion yuan. By December 1941, when the United States entered the war, the Chinese money supply had increased to 22.8 billion yuan,” wrote Richard Ebeling, which lines up with the spike in the Shanghai’s yuan-denominated price spike.
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