The $600 billion reason why China's stock market crash might get a whole lot worse

pulse

October 21, 2018 11:56 AM

Fears of a slowing economy, rising debts and the impact of US President Donald Trump's trade war have all played a role in pushing the Chinese market lower. But there's another factor at play.

Chinese stocks have lost more than 30% of their value since the start of 2018.
Fears of a slowing economy, rising debts and the impact of US President Donald Trump's trade war have all played a role in pushing the Chinese market lower.
However, a wave of forced selling of company shares could see the market drop even more.
Hundreds of Chinese companies use their shares as collateral for loans, and are forced to sell when their share price drops below certain levels.
Analysts believe this trend is likely to exacerbate the major declines already seen in Chinese markets this year.

Perhaps the biggest financial market story in 2018 so far is the colossal fall from grace of the Chinese stock market, which has witnessed losses in excess of 30% since the start of the year.

The fall, which has seen the benchmark Shanghai Composite index drop to its lowest level in almost four years this week, is generally explained through the prism of investors realising that the blockbuster growth China has enjoyed over the last decade is on the wane, and that things are likely to slow down to a strong, but not stellar, rate.

Such a view has been exacerbated by the rise of the trade conflict between the US and China, which has seen the world's two largest economies exchange tit-for-tat tariffs, which now apply to goods totalling close to a cumulative $300 billion.

Many economists see the trade war having a major negative impact on Chinese growth, with JPMorgan earlier in October saying a full-blown trade war could have a 1% shrinking effect on the economy.

While these two factors are evidently at play, there's reason to believe that another factor could soon come into play, and force Chinese stocks even deeper into bear market territory — forced selling.

In China, hundreds of companies use their shares as collateral for loans, but when share prices fall they are forced to sell in order to maintain a certain level of balance in brokerage accounts, used to lend the companies money.

Bloomberg

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