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China’s stock market plunge: how did it happen?

Latest Update: July 8, 2015 | 220 Views

SHANGHAI: Chinese stocks resumed falling on Tuesday despite the government unveiling an unprecedented package of measures to boost the flagging market after a spectacular bull-run reversed course in June.

The benchmark Shanghai Composite Index fell 1.29 per cent, or 48.79 points, to end at 3,727.12 on turnover of 776.1 billion yuan ($126.9bn). It was down as much as 5.05pc during the day.

Why did the market surge? China’s stock market surge started in late 2014 despite the economy experiencing its slowest growth in 24 years.

The borrowing-fuelled rally began after the central bank cut interest rates on Nov 21 for the first time in more than two years, and the launch of a scheme linking trading between the Shanghai and Hong Kong stock exchanges.

The rally continued in 2015 with the benchmark Shanghai index climbing to the symbolic 5,000-point level in early June, driven higher by margin trading, through which investors only need to deposit a small proportion of the value of their trades, generating bigger profits but also potentially exposing them to bigger losses.

When it peaked on June 12 it had risen more than 150 per cent over the previous 12 months.

Why did it fall? On the same day as the market reached its peak, China’s securities regulator said it would tighten rules on margin trading for individual investors. The following day, the China Securities Regulatory Commission (CSRC) also banned trading with funds borrowed outside the margin trading system.

When markets reopened investors started to take profits on worries of over-valued stock prices and increasing market risk.

The de-leveraging process soon became uncontrollable, resulting in Shanghai plunging almost 30pc over three weeks. Market sentiment worsened as investors who traded on margin were forced to liquidate their stock holdings to make payment.

What’s being done to support the market? The Shanghai index plunged 7.4pc on June 26 and the next day China’s central bank announced cuts in both interest rates and the reserve requirement ratio — the amount of money banks must put aside.



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