Wednesday , 26 October 2016

The Great Fall of China: Chinese Stock Markets In Complete Collapse – Here’s Why

Chinese stock markets are in complete collapse right now, with the main Shanghai Composite index losing 30% of its value in just the past three weeks. This article explains why it has happened and what it means for other stock exchanges around the world.

The above edited excerpts, and the edited copy below, is from an article* from entitled Here’s a simple explanation of why Chinese stock markets are in free fall right now which can be read in its entirety HERE.

A huge amount of money has been put into Chinese stock markets over the past year or so by millions of regular Chinese people, something the government has encouraged, and this rush of money into Chinese stocks has coincided with a surge in the benchmark Shanghai Composite, which had risen over 150% since the start of last year when it peaked in June.


Why Has This Happened?

Unfortunately, however, the companies whose share prices were rising were going up simply because there was so much demand and people were bidding prices up. When the cracks began to show in the share price of a few notable Chinese companies earlier this year, the SSEC went into free fall which unleashed the biggest problem of all — margin calls.

Most of the retail investors who put money into shares weren’t using their own cash, but using their money as collateral to borrow way more money than they had to invest. This is known as leveraged investing. When investors are forced to sell shares to pay back the money they borrowed (i.e. bought on margin) to cover the losses they had incurred it causes a vicious circle of selling creating “panic” and pushing down prices even further.

Chinese brokerages went all in on this but when prices went down the brokerages that had advanced all this money (approx. 9% of the exchange’s entire worth) asked investors to put up more cash to cover the fall in value. While sophisticated investors would have the resources to do this and the understanding to calculate whether it was worth the risk most retail shareholders just sold the stock they had already bought, using this cash to meet the fees. That’s now creating the opposite problem of the one that inflated the market — a wealth of sellers, pushing down prices.

Even though the Shanghai Composite has fallen off a cliff in recent weeks, it looks as if the fall will continue, as repeated efforts by the Chinese government to stem the losses have failed, and Citi calculates that just one out of four leveraged investors has been driven out of the market. Plenty more have yet to be flushed out.

What Does This Mean For Other World Stock Exchanges?

The panic is now starting to spread to other markets that haven’t been hit by the same problem. It doesn’t look as if this will end well.


Related Articles of Interest:

1. China: The Stock Market Meltdown Continues

2. The Crash In China Continues – And Is Engulfing Hong Kong

3. Wall Street Breakfast: China Rebounds But Worries Persist

4. China Stock Crash: Index Up Only 72% In The Past Year

5. The Chinese Government’s Attempt To Fix Its Stock Market Will Fail

6. Chinese Stocks Down Over 30%. Is It Time To Buy?

7. China Share Slump Infects U.S. As Panic Spreads

8. Is China’s Market A Bunch Of Bull?

9. Big Door Opens To Smaller Chinese Companies

10. China Is Down 5% – Why Are You Looking At Greece?


  1. I’d like to add that I believe that the value of PM’s are being affected by very large investors and/or Governments shorting PM using flat money which they can print as needed. When physical PM’s are required to sell PM’s (aka shorting), then we will see the values of PM’s zoom upward as all those without physical PM’s scramble to acquire them as their values climbs skyward.

    Hopefully now China will change how their stock market functions and perhaps they will be the first Major market to limit naked shorting, which would actually benefit their economy since they also hold massive amounts of PM’s, whose value would rise.

    Parts of the above were posted before at:


    From 12/14/13:

    Naked Shorts Exposed!

    Yes, I agree that the PM market is being manipulated by the Central Banks and their close friends the Big Banks; sooner or later all the things they are juggling to keep the lid on this can of fiscal worms is going to end and then we will se PM’s suddenly restored to there rightful value as everyone scrambles to “fill” the paper trades, which will cause the values of PM’s to skyrocket!

    A good example of what may happen very soon is what happened to VW stock when investors were using naked shorts to drive VW stock downward. Then suddenly there was none to be had, (since VW was quietly buying up as much of it as they could get on the quiet) and those not holding physical shares had to pay what was then enormous amounts to settle their accounts, which made VW stock very valuable!

  2. Yet another example of those with the best “connections” (both insider info and internet speed) were able to escape the crash, leaving everyone else to pay while they raked in BIG profits.

    Imagine all those that bought PM’s instead of stocks, I bet they are all smiling now!

    Shorting and especially “naked shorting” are a plague upon small investors in the stock market.