China started the week on the wrong foot, as the Shanghai composite index tumbled 7 percent, declining from 3,377 points on Friday to 3,114 points on Monday. It has been its worst crash since 2008, when it fell 7.2 percent. The crisis was triggered by China Securities Regulatory Commission’s decision to clamp down on margin lending, as the practice of borrowing money from a broker to purchase stock is defined. On Friday, authorities banned Haitong Securities, Guotai Junan and Citic Securities from opening new margin trading accounts for three months. Unsurprisingly, banking companies were the worst-hit by the slump, with some losing over 10 percent of their value, the maximum allowed in a single day.
According to Bank of America Merrill Lynch, margin trading in China is up 9 percent in 2015, a number that looks quite dodgy, as margin trading tends to magnify both gains and losses. In an interview to the Associated Press, Dickie Wong, executive director of research at Kingston Securities in Hong Kong, argued that the introduction of margin financing and short selling caused plenty of excitement in the Chinese financial world: “In the past, mainland investors had no clue on margin financing and short selling, but after China introduced these two ways to trade stocks, people became so happy because they can borrow money and just go all in.”
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