China’s stock market bubble may finally be bursting.
Shares of Chinese companies plunged on Friday, in the worst drop in that country’s stock market in years. The dive may end the recent quixotic run in China’s market, which has soared this year even as China’s economy has gone through its roughest patch in years. Corporate profits have fallen.
China’s Shanghai Composite index dropped 7.4% on Friday. That would be the equivalent of a more than 1,300-point drop in the Dow Jones industrial average. The Shenzhen Composite, which is dominated by tech stocks, ended trading down 7.9%.
As always in market turns, it is unclear exactly what sparked the current sell-off. Some have pointed to the fact that regulators have recently been tightening rules on buying stocks with money borrowed from a broker, or “on margin.” Officials in China are particularly concerned about stock loans that have been coming from unregulated financial entities.
Excessive buying on margin has been linked to other stock market crashes. Margin lending is at an all-time high in U.S. markets.
Even with the recent losses, the Shanghai Composite is still up 30% so far this year. The Shenzhen Composite is up an astounding 77%, easily making it the best performing market in the world so far in 2015.
Trading Faces: A Weeklong White-Knuckle Ride on the World’s Stock Markets
A trader looks to the German DAX stock index at the stock exchange in Frankfurt/Main, Germany, August 9, 2011. Shortly after the Dax indicated a positive trend the index temporarily fell by 7 per cent. Fredrik von Erichsen—NewscomA trader views his monitors at the stock exchange in Frankfurt/Main, Germany, August 9, 2011. Fredrik von Erichsen—NewscomA share trader reacts on early morning trading at Frankfurt's stock exchange, August 9, 2011. European stocks pared early gains on Tuesday and slipped back into negative territory, as energy shares sank along with oil prices, eclipsing bargain hunting in recently-hammered mining stocks. Kai Pfaffenbach—Reuters A trader works at the Frankfurt Stock Exchange in Frankfurt, Germany, on Aug. 10, 2011. The benchmark DAX index of the Frankfurt Stock Exchange plummeted 303.66 points, or 5.13 percent to 5,613.42. Ma Ning—Xinhua/LandovComputer screens displaying stock prices are reflected in the glass between a booth as a man monitors share prices at the Karachi Stock Exchange, August 5, 2011. Pakistani stocks provisionally ended 3.78 percent lower on Friday as foreign investors offloaded their holdings amid a global sell-off, while local investors remained cautious, dealers said. Akhtar Soomro—ReutersA man is lit by a screen displaying share prices at the Karachi Stock Exchange, August 5, 2011. Pakistani stocks provisionally ended 3.78 percent lower on Friday as foreign investors offloaded their holdings amid a global sell-off, while local investors remained cautious, dealers said. Akhtar Soomro—ReutersA Pakistani stockbroker talks on a phone during the trading session at the Karachi Stock Exchange (KSE) in Karachi, August 10, 2011. The benchmark KSE-100 index was 11308.99, with increase of 274.07 points in the morning session. Rizwan Tabassum—AFP/Getty ImagesAn Indian stock broker reacts as he watches the Bombay Stock Exchange (BSE) index on his trading terminals in Mumbai, India, August 10, 2011. Asian stock markets jumped Wednesday following a surge on Wall Street triggered by a Federal Reserve pledge to keep interest rates super low for the next two years to help the ailing U.S. economy. Rajanish Kakade—APA broker looks at a screen before putting on his tie at the Stock Exchange in Madrid, August 8, 2011. The borrowing costs of both Spain and Italy dropped sharply in early trading Monday after the European Central Bank signaled it would intervene in the markets to keep the two countries' bond prices supported. Paul White—APA trader talks on his mobile phone next to miniature Philippine flags during trading at the Philippine Stock Exchange in Manila's Makati financial district, August 5, 2011. The Philippine Stock Exchangeís main index fell more than 2 percent on Friday before paring losses to close down 1.4 percent. World stock markets fell for the eighth straight session on Friday to the lowest since late 2010, with more losses feared if policymakers do not come to the rescue soon to stabilise the euro zone's debt crisis and prevent the U.S. economy from sliding back into recession. Erik de Castro—ReutersIsraeli stock market traders work at their office in the Meitav investment house in Tel Aviv, August 8, 2011 a day after key Israeli stock indices fell around seven percent and trading on the Tel Aviv stock exchange was temporarily halted after news of a US credit rating downgrade. Menahem Kahana—AFP/Getty ImagesA trader works on the floor of the New York Stock Exchange during afternoon trading, August 3, 2011. The Dow closed 29 points up after a late afternoon rally, recovering from an eight day slump. Andrew Burton—Getty ImagesA trader works on the floor of the New York Stock Exchange during morning trading, August 3, 2011. The Dow slipped five points at the opening due to investor fears over a weak economy. Andrew Burton—Getty ImagesTraders work on the floor of the New York Stock Exchange, August 9, 2011. World stocks recovered after their 10th straight day of declines on Tuesday as Wall Street managed to put a brake on losses for the time being, with investors turning their attention to a meeting of the U.S. Federal Reserve. U.S. stocks were up more than 2.0 percent shortly after the opening bell and European shares also bounced to gain 0.2 percent. Brendan McDermid—ReutersNEW YORK, NY - AUGUST 04: A trader bows his head on the floor of the New York Stock Exchange after the closing bell on August 4, 2011 in New York City. The Dow plunged more than 500 points and is down more than 1,200 points since July 21. It was the market's worst one-day drop in more than two years. Mario Tama—Getty Images)A trader on the floor at the New York Stock Exchange, August 8, 2011. Wall Street stocks plummeted on Monday as skittish investors, already concerned about the economy, struggled to work out the implications of an unprecedented downgrade of the United States governmentís credit rating, and sought safer places to put their money. Benjamin Norman—The New York Times/Redux
