(Reuters Business Report) – By now, you’ve probably heard that China’s stock market is swinging wildly.
Sparking panic as one of the world’s biggest economies experiments with a free market.
But what exactly is behind all of the uncertainty?
REUTERS REPORTER, TARA JOSEPH,
“Well, one of the key reasons is margin trading. And what that means is investors borrowing from brokers and banks in order to invest in their favorite stocks. Now, this can be a big gamble because if the value of stocks falls, that means the investor potentially has to pay back a lot of money.”
Margin trading in China was worth more than 300 billion dollars in the first few months of this year alone.
That’s thanks to an explosion of cheap credit to retail investors – many of them new players in the stock market.
China’s regulators have run hot and cold on whether to allow this type of borrowing.
This week, they canceled a rule clamping down on margin trading to try and get investors to wade back in.
In the past two weeks alone, around two trillion dollars has been wiped off the value of mainland China stocks – that is three times the value of Apple.
For many, Chinese trading is a double-edged sword.
On the one hand, the country is opening up its markets, showing signs of development and opportunity.
But at the same time, risky trading practices like margin trading could trigger a potential crash that could unnerve investors around the world.