China's Stocks Just Plunged 8%, World Shrugged
Markets react as Beijing cracks down on firms that lend cash for stock buys
By Newser Editors and Wire Services
Posted Jan 19, 2015 12:20 PM CST
People walk by an electronic stock board of a securities firm in Tokyo, Friday, Dec. 26, 2014.   (AP Photo/Koji Sasahara)
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(Newser) – Chinese stocks plunged today after the country's securities regulator rapped three major brokerages for continuing to lend money for stock purchases in violation of rules. As punishment for extending so called "margin trading" contracts, the brokerages are forbidden to offer credit to new customers for three months. A look at what happened:

  • How much did shares fall? At one point today, the Shanghai Composite Index was down 8.3%. It later trimmed that to 7.7%. Share prices of brokerages were hardest hit, with some falling by the daily loss limit of 10%. Despite the sharp fall, the Shanghai Composite Index is still up 55% in the past 12 months and 33% in the past three months.

  • Why the freefall? The penalties are seen as foreshadowing more curbs on credit-financed trading by Beijing, which wants to stop the past year's boom from turning into a bubble. The Shanghai Composite surged 54% last year, partly because of easy credit that investors used to finance trading.
  • Did the rest of the world plummet, too? No. Other markets are brushing it off as a situation peculiar to China. The exception was Hong Kong, where many Chinese companies have stock market listings.
  • Experts say: "Margin financing is simply overextended," says one, and regulators want to "simply give pause" to brokerages.
  • Tip of the iceberg? It shows problems on several levels. Although all markets are prone to under- and overshooting due to herd psychology, China's market is particularly off-course, in part because it is dominated by opaque state-owned companies. China's stock markets have fluctuated in ways that bear no relation to economic reality. It's also seeing a debt-driven jump in stock prices and debt-related stress in the property market.

 

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