Taking stock of China’s stock market crisis

Taking stock of China’s stock market crisis

The Chinese stock market has fallen dramatically in the past month, culminating in more than $3trn being wiped off share values. Linda Yueh, Fellow in Economics, Oxford University and Adjunct Professor of Economics, London Business School, examines the crisis in more detail and assesses its impact on the UK economy.

Original news

China: CSRC taking further measures to stabilise markets, LNB News 13/07/2015 21

City AM, 13 July 2015: The China Securities Regulatory Commission (CSRC) has issued new rules as it attempts to stabilise markets, following sell-offs which wiped trillions of dollars’ value from Chinese equities.

What has led to the stock crisis in China?

Global markets were weakening and the government clamped down on margin lending (whereby the broker can make a demand for more cash or other collateral if the price of the securities has fallen) to buy stocks, so unsurprisingly China’s stock markets followed suit. Because some 85% of trades are rather unusually done by retail investors, China’s stock market experiences high volatility since it is more likely to follow ‘herd’ behaviour. Small investors assume that others have better information, so when selling (or buying) happens, there is herd-like movement as investors pile in. The market has also risen sharply (up to over 150% in the past year and is the best performing major market in the world), so some want to cash in, which leads others to do the same. To put it in context, the market is still up from the start of the year despite recent dramatic falls.

What are the challenges with th

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