Bespoke Invest goes so far as to call this China's Lost Decade.
However, I think that's a bit sensationalist as you can see from the chart, the Index has been relatively stable from 2000-2007 in the 1000-2000 range. A side note, its interesting that the Shanghai composite really does not track China GDP or growth as China was still growing double digits during that time frame but the Shanghai index actually dropped in that time frame. Regardless, it was a sudden bubble in 2007-2008 where it jumped before falling back down. If you look at the overall trend minus the bubble and stimulus, the Shanghai composite is actually close to where it would be from a historical average. Whether it should be there or not however is a different story.
Several stories have pointed, China's retail investor population is extremely underdeveloped. Bloomberg pointed out:
While overseas firms were granted $6.9 billion of quotas to purchase mainland securities since December, more than in any full year since the government program began, the number of Chinese stock accounts containing funds dropped by 788,000 to 56.3 million in the year to Aug. 3, the most for a 12-month period. A record 110 million are empty or frozen, according to regulatory data compiled by Bloomberg.
Falling valuations aren’t enough to entice Yao Lina, a 32- year-old accountant in Shanghai who sold all her stock holdings in February and withdrew 80,000 yuan ($12,580) from her trading account. She has no plans to invest in equities, saying the government may take as long as five years to fix “structural” challenges in the economy that have curbed growth.
As economic growth has slowed, the number of Chinese equity accounts that contained assets fell for 11 straight weeks through Aug. 3, the longest stretch of declines on record, according to the China Securities Depository & Clearing Corp.
Investors opened 322,851 new accounts to trade shares last month, the fewest since the clearing house began publishing the weekly data five years ago and down from a peak of 4.1 million in the four weeks to Sept. 21, 2007. The 110 million empty or frozen accounts are equivalent to about 8.5 percent of China’s 1.3 billion people and exceed the populations of Germany and the Philippines.
So where is the money going? Well many alternative investments, in particularly real estate. While real estate prices are starting to increase again in China, its too early to say if its a blip or a long lasting trend. However, what is sure is that until a large retail investing culture takes hold in China, the Shanghai index will not be able to generate or reflect the growth that China is experiencing. With the structural issues that China faces, don't expect to see that anytime soon.