The Chinese stock market crash explained

If you’re anything like me, you’ll have been so focused on the crisis in Europe, that you’ve failed to give enough thought to what’s going on on the other side of the planet … in China.

The $3 trillion wiped off the value of Chinese companies since 12 June dwarfs the Greek government debt … and the implications of this Chinese stock market crash could have an even bigger effect on us that the wranglings of the Eurozone.

So, what’s gone wrong in China?

If you’ve already read my post today about margin, this will be eerily familiar.

The Chinese have been borrowing money to buy shares.

With a stock market that’s grown 150% in the 12 months to June, you can see why.

But with the value of shares falling, we have the worry that small-time investors will have to sell their shares to meet their debts – so price falls accelerate and panic sets in.

The result is that many companies on the stock exchange have suspended trading, and Beijing has cut interest rates in an attempt to end the panic.

Problem is that when investors see companies and the government forced into extreme measures, it does little to calm their fears.

This could snowball.

While most global markets aren’t directly tied to the Chinese stock markets, an economic downturn in the world’s second-largest economy is going to affect us.

The Chinese economy is closely linked to the commodities market, but there’s a leveraged (that word again) link with copper …

… due to capital controls, many people take short-term loans to buy copper and then use that copper (stored in a warehouse) as collateral to borrow money at a reduced rate. It’s estimated that 40% of the world’s copper is stored in Chinese warehouses.

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