In a period shorter than a month, the Chinese market has lost over 3.6 trillion in value, which is greater than the GDP of France. Many see this as mimicking the 1929 U.S. stock market crash. Also, this plummeting of equities is beginning to seep into surrounding Asian countries. The cause of this sell off? Simply, millions of average Chinese investor dumped lent funds into the market. The prices, correlating with this buying spree, were then severely over inflated. What happened next can easily be explained as a cycle of panic caused by leverage investing.
The equity markets fell, the Chinese citizens sold off shares to cover these losses on lent money, and the cycle continued on as people panicked. At its peak the extent of leveraged investing amount was around seven hundred billion dollars. The stock market in China contains 80% percent “retail investors”. The U.S.? Around 54%. The massive effect is quite obvious when taking these percentages into consideration. Why are these percentages so vastly different? Last year, the Chinese government encouraged the “Chinese Dream” of a society wealthy and prosperous. Part of this dream was to encourage all citizens to be involved with stock market. “We must deepen economic system reform by centering on the decisive role of the market in allocating resources….” — President Xi Jinping