As people turn their attention to Greece as the austerity measures have been voted on and recently denied, on the other side of the world China is feeling their own financial pain. It has been a record setting 12 continuous days that the margin debt balances in China have plummeted. This less of capacity to hold securities in trading accounts, due to insufficient margin, has resulted in a loss of around $2.6 trillion or roughly 40 percent of the Chinese market’s total value.
Since last night, accumulative amounts greater than 54 percent of all Chinese stocks have been frozen at a standstill. Approximately 270 out of 1694 Shenzhen stocks have been halted or suspended along with hundreds more from Shanghai.
In an attempt to curb this massive drop in value, reminiscent of the great 1929 stock market crash in the United States, China has taken some measures to help manage leverage within the market. They have done this primarily by lightening up the rules for insurers who purchase blue chips. In addition, China has also directly financed the shares of smaller companies when purchased by outside shareholders.
Despite China’s best efforts, leverage is still at record setting heights as the collateral value is dropping at a rate that is faster than margin debt, forcing people to sell. Shanghai has seen its largest one-day drop in history as the margin debt plummeted a stunning 8.5% yesterday.
Although China has had one of the most successful and fruitful economies in the past few years, it is important to watch their stocks closely. Any sort of fluctuation or shifts, especially ones as violent as these recent events, can be felt around the world. With the Eurozone on the brink of kicking out their first member, and the Chinese stock market experiencing its largest plummet ever, these next few months will be a critical time for the world economy.
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