In the Chinese lunar calendar, 2015 is the Year of the Sheep. Thus, what better animal to guide us through the market panic that has seen China’s stock markets lose 30 percent of their value over the past month?

In 2014, after decades of staggering rates of growth, China’s economy began to falter, slowing to 7.3 percent growth, its lowest rate in 24 years. For the first time since 1999, the economy failed to hit its government-set annual growth target.


The slowdown forced China’s central bank in November to cut interest rates for the first time in two years. Combined with the launch that same month of the Shanghai-Hong Kong Stock Connect – a new investment channel linking the nation’s two largest stock markets – equity prices in the fourth quarter once again began to rise.


Stocks continued to rally through most of 2015, with many traders buying on margins enabled by the lower borrowing rates from the central bank and with support provided to the brokerages by the government-run China Securities Finance Corp. The Shanghai Index hit a June 12 peak of 5178.19, a seven-year high that was up more than 162 percent from its 2014 low. Together, at their peak, the Shanghai and Hong Kong exchanges had a combined value of more than $10 trillion. Some thought it would go on indefinitely.


With margin financing having grown fivefold, to about $434 billion, from June 2014 to June 2015, the China Securities Regulatory Commission on June 13 introduced rules capping the amount of margin trading a securities brokerage could do at four times its net capital. The CSRC also announced it would be investigating the huge market of investment finance used to trade stocks outside of the brokerage system. This brought the bull market to a screeching halt.


Investor reaction was nearly instantaneous. With these tighter leverage restrictions and a lack of guidance about whether the central bank would extend any further liquidity, China’s stock market saw its biggest two-week plunge since December 1996. There was a massive round of profit-taking as investors headed for the exits.


By June 26, the Shanghai Index had fallen 19 percent from its June 12 high, including a 7.4 percent drop on that Friday alone. The People’s Bank of China responded June 28 with its fourth rate cut since the November cut that started the rally, cutting the one-year lending rate by 25 basis points to a record-low 4.85 percent. It did little to calm the market’s jitters.


The central bank, which previously had cut banks’ required reserve ratio by 50 basis points in February and 100 basis points in April, also stepped in with a contingent 50 basis point cut in the reserve ratio, which for some banks – particularly those lending to farmers and small businesses – would now be just 18 percent. This news was treated as ho-hum.


Instead, the crash began to accelerate, with a 3.3 percent fall in the Shanghai Index on June 29 being called China’s “Black Monday.” Though the CSF (the government’s margin-financing provider) reassured markets that margin calls were manageable and the CSRC urged calm, investors remained jumpy.


Things briefly looked brighter on June 30. The Hang Seng Index in Hong Kong finished up 1.09 percent; the Shanghai Composite Index was up 5.5 percent; the Shenzhen Component Index was up 5.7 percent and the tech-heavy ChiNext Index was up 6.3 percent. This may partially have been a reaction to the announcement that local government-managed pension funds would be allowed to invest in the stock market for the first time, offering the possibility of $161 billion in fresh capital.


But the good news didn’t last long. When trading closed on the first day of July, stocks were down 5 percent for the day and total shareholder wealth lost since the sell-off began hit $2 trillion.


On July 2, the CSRC walked back the margin-trading requirements that had sparked the sell-off, ending compulsory sell-offs. The China Securities Finance Corp. also announced it would boost its support of brokers’ margin-lending services from 24 billion yuan to 100 billion yuan. The markets nonetheless fell another 3.5 percent, as investors let everyone know what they thought of this belated plan to undo the damage.


The China Financial Futures Exchange reportedly imposed a one-month suspension of short-selling by 19 accounts and the country’s 21 largest brokerages pledged to invest $19.3 billion into the markets. Nonetheless, the slide continued, as the Shanghai Index lost 29 percent from its peak through July 3. Investors remained spooked.


Through the sell-off, public anger about short selling continued to fester in some quarters. Rumors spread through the Wechat messaging service that the market’s crash was the result of foreign actors like Morgan Stanley or George Soros, with the CSRC at one point specifically having to quell a charge that Goldman Sachs was responsible.


Nonetheless, on July 5, the China Financial Futures Exchange moved to halt short selling through index-futures contracts, capping the number of new contracts an investor could buy or sell daily at 1,200. What’s more, the country has halted all initial public offerings and more than half the country’s stocks have suspended trading altogether.


But there are signs the worst may be over. The CSF announced July 8 that it would lend 260 billion yuan (about $42 billion) to the 21 largest brokers to buy shares of blue chip stocks. The country’s main stock indexes have had a bumpy few days, trading gains and losses. Today, the market enjoyed its biggest gains in six years. The Shanghai Composite closed up 5.8 percent, the Shenzhen Composite was up 3.8 percent and the Hang Seng was up 3.9 percent. Nonetheless, it’s likely to be a while before it’s once again smooth sailing in Chinese markets.


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