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Why Chinese stock markets are in free fall right now

bankofchina

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. The turmoil is now starting to spread to other Asian markets and global commodities markets.

The reason behind the crash is this: Millions of ordinary Chinese citizens poured borrowed cash into shares, which inflated prices to unsustainable levels.

When prices began to dip, these investors were forcing to sell shares to pay back the borrowed money and cover losses. That vicious circle of selling is creating “panic” and pushing down prices.

A huge amount of money has been put into Chinese stock markets over the past year or so by regular Chinese people, something the government has encouraged. There are now 90 million “retail” investors — ordinary people who own stocks — in China, making up 80% of all shareholders. That means there are more stock-market investors in China than there are Communist Party members, Bloomberg noted recently.

The rush of money into Chinese stocks coincided with a surge in the benchmark Shanghai Composite, which had risen over 150% since the start of the year when it peaked in June.

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Source: uk.businessinsider.com

Photo credit: epSos.de / Foter / CC BY

 

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