The Short View: Why China’s Stock Markets Went into Free Fall

Chinese stock markets went into free fall during the past month (June 2015) with the main benchmark Shanghai Composite Index losing nearly a third of its value.  Why?

• Millions of Chinese borrowed money to buy shares and Beijing encouraged commercial lenders to extend credit to finance such purchases. This caused share prices to inflate to unstainable levels.
• When prices began to fall the investors were forces to sell shares to pay back the money they had borrowed to cover their losses.
• This vicious circle of selling created panic and pushed prices lower.
• The turmoil started to spread to other Asian markets and commodity currencies (e.g. South African rand).

The Chinese authorities have moved to stop the drop in the Chinese stock markets by:

• banning the sale of shares by major stakeholders;
• allowing funds from the central bank to be used for buying shares; and
• ordering listed companies to submit plans to stabilise their stock prices, via measures such as purchases by company executives and share buybacks.

 The above measures started to have a positive effect on July 9 when the Shanghai Composite rose sharply.    We shall watch with interest …

 Source:  Business Insider / Financial Times