China's benchmark index, the Shanghai Composite, plunged by almost 8% last Monday, its worst one-day slide in almost seven years, after regulators banned three major brokerages from opening new margin trading accounts for three months. "It was essentially a giant margin call on a highly leveraged market," says Aaron Back in The Wall Street Journal.
Margin financing where investors borrow to buy stocks has been a key driver of the rally. Overall margin loans have more than tripled in the past 12 months. Margin trading accounts for around a fifth of daily turnover, calculates Credit Suisse. There may be further falls.
The government could raise the tax on equity trading. And it's not clear that the state will stimulate the slowing economy. Still, valuations remain reasonable for long-term investors wanting to bet on China's potential.
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