What goes up, can also come down, as the old adage and the modern-day investor warning go. And that is precisely what the tens of millions of people who hold shares in China have been discovering.
Chinese stocks had doubled between last November and mid-June, to the delight of a fast-growing army of retail investors. In echoes of the dotcom bubble in the US, much of the speculation, fuelled by borrowing, has been on technology stocks. But now shares across all sectors are tumbling. After another punishing week, and despite a surprise move last week by the central bank to cut interest rates, shares are now down nearly 30% from their peak less than four weeks ago.
Analysts had doubted that cutting borrowing costs to stabilise a sell-off in an overheated market would work even in the short-term – there were fears it might well cause more alarm. In the longer-term, making borrowing easier in response to a problem caused by debt-fuelled speculation made little sense. And so it proved. The panic selling continued this week and concern about investors’ debt levels intensified.
At the centre of this dramatic stock market slide are individual investors borrowing from a broker to buy securities. Under that system the broker can make a demand for more cash or other collateral if the price of the securities has fallen – known as a margin call.
Such trading has been a key driver of the booming market, but regulators are cracking down. The resulting falling share prices have in turn have triggered margin calls. Investors and policymakers are looking on with fear because if those margin calls continue, investors will have to offload other assets to come up with the cash they need.
For those who trade with China, the contagion fears add to worries that have been bubbling under for some time. China’s economy was already losing steam and the next GDP figures are expected to show the slowest growth since before the financial crisis. It might in time make the financial fallout from Greece look tame.
