The recent Chinese stock market mini-crash has underlined the fundamental role of debt in Chinese share-trading.
The Economist reported that Goldman Sachs reckons outstanding margin financing, at 2.2 trillion yuan ($355 billion) earlier last week, was the equivalent of 12% of the value of all freely traded shares on the market, or 3.5% of China’s GDP.
Both “are easily the highest in the history of global equity markets,” its analysts noted.
With Chinese shadow banks and peer-to-peer lenders also offering cash to investors, the amount of hidden leverage in the market is estimated to be as much as 50% higher. That debt helped fuel the initial stock rally. It is now adding to the pain, as leveraged investors rush to sell their holdings to cover their debts.
The Economist argues the case as to long term impacts on further China economic development as this market confidence struggle plays out.
Also see the BBC for second source economic reports on this China story.