The Chinese Market meltdown:

The Chinese authorities’ attempts to stabilize the country’s stock markets have been frantic—and futile. Interest ratesblog have been cut; short-selling capped; IPOs halted; share-buying schemes hatched (backed by central-bank cash).

But the rout continues: the CSI 300 big-company index has fallen by one-third since early June; ChiNext, a would-be NASDAQ, by two-fifths. Trading in over half of Shanghai- and Shenzhen-listed shares has been suspended. Yet the stock market is still small by rich-world standards. Bull or bear, it makes limited difference to the real economy. Its political importance is rather greater.

The government, having staked much credibility on its rise, is now dented by its fall and the hapless efforts to support it. The policy panic makes clear that China’s leaders, though they praise market forces, still imagine they can control them. In that sense, the crash is welcome—as a demonstration to the Communist Party that it cannot forever bend markets to its will.

Here is a small brief why the markets went down in China:

  • Between June 2014 and June 2015, China’s Shanghai Composite index rose by 150 percent.
  • A big reason for the stock market rally was buying stocks with borrowed money, known as “trading on margin”
  • Chinese authorities have gradually relaxed requirements over the last five years.
  • A crash in the property markets last year forced many retail investors to divert their funds to equity markets.
  • During this period, the amount of officially sanctioned margin trading in the Chinese stock market ballooned from 403 billion yuan to 2.2 trillion yuan.
  • With Chinese shadow banks and peer-to-peer lenders also offering cash to investors.
  • Government used all the machinery in its hand including state media to urge public to invest in stocks.
  • The surge in stock prices alarmed Chinese authorities, and so earlier this year they took steps to rein in margin trading and other forms of leveraged investing.
  • In January, they raised the minimum amount of cash needed to trade on margin, once again restricting the practice to wealthier investors.
  • The government cracked down on vehicles designed to skirt the margin trading rules in April.
  • The government’s toughest measures came on June 12, when China’s securities regulator announced a new limit on the total amount of margin lending stock brokers could do, while also reiterating the curbs on illicit margin trading.
  • The stock market has been falling ever since. The Shanghai Composite index has now lost 32 percent of its value since the June 12 peak of 5,166.

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