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In an effort to arrest an ongoing market slide, the Chinese government relaxed rules on the practice of borrowing money to speculate on stocks. The move was one of a variety of measures recently introduced by Chinese authorities in an effort to ward off panic among investors.
As detailed in a recent article from Forbes, China's Securities Regulatory Commission eased rules on margin trading after a previous interest rate cut failed to shore up mainland markets. Under the new regulations, minimum deposit requirements for investors were lowered, a move that Chinese officials hoped would serve as an inducement for investors to stay in the market.
The move represents something of a reversal, as margin rules were tightened in June in an effort to curb risk. That decision backfired—or at least failed to have the intended effect—as Chinese markets continued to tumble. Margin financing, in which a buyer borrows in order to invest, is viewed as somewhat risky. However, the practice was one of the primary drivers of explosive Chinese market growth in the last 12 months.
Given China's immense importance as the world's second largest economy, the protracted market slide has set off alarm bells for investors and government officials alike. While the Chinese market is among the world's most volatile, this most recent turbulence is particularly notable for its severity. Fear of an even deeper bottom are prompting worried traders to unload their positions, while some deep-pocketed buyers are bargain hunting, believing that the Chinese government will take every step available to avoid a market crash.
While China's stock markets have recovered some measure of stability in recent days, the effects of stock suspensions and significant government intervention will likely continue to rattle investors in the weeks and months ahead. It's important to note, however, that while the Shanghai Composite Index was down as much as 30 percent since June, that dip came on the heels of a 150 percent surge since January 2014. That surge was prompted by huge numbers of new Chinese investors entering the stock market.
Viewed in that context, the market turbulence of recent weeks could be viewed as a temporary correction, rather than the beginning of a full-on crash.
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