On Tuesday morning, the Shanghai Composite index fell more than 8.2 percent in just the first three minutes of trading. This is merely a continuation of the chaotic state of the Chinese stock market over the course of the past month. The Shanghai Composite Index has fallen over 32 percent in three weeks, with 12 percent coming from the past week alone.
A partial explanation for China's situation can be traced back to policies implemented by the Chinese government. Strict rules for investing were enacted in an attempt to control the flow of the stock market; only wealthy Chinese citizens and companies could afford to meet the basic requirements. Typical minimum investments for unit trusts, for example, were between 5,000 and 10,000 Chinese yuan (between 800 and 1,600 USD, or 500 and 1,000 euros); minimum wage employees frequently only make 1,300 yuan per month, and the average salary of an employee in an urban region is approximately 29,000 yuan per month. This section of the population was effectively blocked from participating in the stock market because investments were unaffordable.
However, several years ago, the Chinese government decided to relax their strict investment policies in an attempt to rely on a more free market approach. Previously, it had been difficult for Chinese citizens to invest using borrowed money; with fewer regulations and looser investment laws, Chinese authorities began to turn a blind eye to margin trading. That is not to say the government wanted the stock market to become a free for all―there were still numerous laws indicating both which stocks an investor was limited to and for how long the money could be borrowed.
These laws were evaded and borrowed money poured into the stock market. Between June 2014 and June 2015, stock prices increased as much as 150 percent, and the amount of officially sanctioned margin trading jumped from 403 billion to 2.2 trillion yuan. However, this period of rapidly increasing investment coincided with a notable slowdown in China's growth. This sparked anxiety among government officials, who felt the market was beginning to spiral out of control. They began reinstating stricter guidelines, once again raising cash minimums on investments and implementing new limits on the total amount of margin lending that could occur. These new measures squeezed out the new group of investors, and triggered tumbling stock prices.
Currently, the Chinese government along with dozens of companies are scrambling to slow the decline of China's domestic stock market. Regulators have capped short selling and suspended new share listings, The People's Bank of China has slashed interest rates, and brokerage firms are offering to buy millions, if not billions, of dollars worth of stocks. Over 1,000 companies on the mainland have stopped trading altogether until further notice.
In spite of this massive panic on behalf of the Chinese government, and the many comparisons to the start of the United States' Great Depression, it is difficult to discern whether or not this crash will have a significant impact on foreign nations or its own people. China limits overseas investments; much of the trade in China's stock market takes place internally. Even so, firms such as Morgan Stanley are currently urging investors to avoid Chinese stocks, earning them significant backlash from government officials. Many worry that the downfall of China's market will eventually make its way overseas, although until recently there have been no notable effects. This concern stems from the previous positive movement in China's stock market, which is credited with overall increases in global markets. China's crash, combined with the current tensions stemming from Greece and the Eurozone, are causing markets to become volatile
However, it should be acknowledged that Chinese stocks listed overseas are not immune to turbulence in their home stock markets. For example, the Chinese companies Alibaba
It is important to note that in spite of 80 percent of all Chinese market trades occurring on the mainland, the average Chinese citizen does not have a huge stake in the stock market. According to Qu Hongbin, HSBC's chief economist for Greater China, "stocks represent less than 15 percent of household financial assets and equity issuance accounts for less than 5 percent of total social financing." However, this has done nothing to quell the fears of Chinese officials, who will continue to try to control the market for the foreseeable future.
