The 2015 China Stock Crash — When a Bubble Inflated by Debt Bursts
When more people borrow to buy stocks, the index rises fast. The problem is that it falls just as fast on the way down.
A Surge Made by Debt, and Then the Plunge
In 2014–2015 the Chinese stock market surged as "margin trading," in which individual investors borrowed money to buy stocks, grew explosively. The Shanghai Composite Index soared to about 5,166 in mid-June 2015.
But when authorities tried to regulate overheated margin trading, the mood reversed sharply. The index slid to a trough of about 2,964 in August, about -32% below the high, and the Shenzhen market fell even more, about -40%. In this process about 3 trillion USD in market capitalization evaporated.
The timing of the high is cited slightly differently by source as June 12 or 16, 2015. The drawdowns — Shanghai about -32%, Shenzhen about -40% — largely agree.
The Circuit Breaker Scrapped After Four Days
The following year, in January 2016, China newly introduced a circuit breaker that halts trading during sharp drops. But on January 4 and 7, the index plunged nearly 8% each time, triggering the circuit breaker.
The problem was that the fact "trading will halt soon" instead spurred panic selling by investors. Ultimately, authorities scrapped the circuit breaker just four days after introduction. It remained an example of a system meant to prevent a crisis instead amplifying fear.
The Lesson — the Double Edge of Leverage
Investing with borrowed money makes gains bigger on the way up, but losses grow just as much on the way down, and you can be pushed into forced selling (margin calls). China's 2015 market is a classic example of leverage amplifying both the rise and the fall.
It was also confirmed that a government's market-support measures or new systems do not always work as intended. For an individual investor, the safest preparation is not to take on debt you cannot bear.
Preguntas frecuentes
Q. Why is margin trading dangerous?
When you invest with borrowed money, the brokerage can forcibly liquidate (margin call) your position when the price falls below a certain level. In that case you are sold not at your desired price but at the lower price the market sets. When such forced selling piles up in a falling market, the drawdown grows even larger.
Q. Does the market stabilize when the government intervenes?
There can be a calming effect in the short term, but there are also cases where it backfired, like China's 2016 circuit breaker. The result of policy intervention is hard to predict. Rather than relying on a specific policy, your own risk management comes first.
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