shanghai stock exchange Zhengyi Xie/ZumaPress

China’s Malfunctioning Financial Regulation

The tumult in China's equity market appears to have come to an end. But considerable uncertainty remains, not only about what caused the recent plunge in the Shanghai and Shenzhen stock exchanges, but also about what the episode will mean for China’s financial-reform efforts.

SHANGHAI – The tumult in China’s equity market appears to have come to an end. But considerable uncertainty remains, not only about what caused the recent plunge in the Shanghai and Shenzhen stock exchanges, but also about what the episode will mean for China’s financial-reform efforts.

China’s stock-market crash has been attributed to a variety of factors. Official media initially attributed the disaster largely to the “malicious” short-selling of Chinese shares by foreign banks and traders. Later, domestic investors were added to the list of suspects, and the Chinese authorities announced a rigorous investigation into the source of short selling.

More recently, the discussion has shifted toward a seemingly more credible cause: the proliferation of margin financing since 2010. With retail investors borrowing large amounts to finance share purchases, participation in the stock market surged, effectively turning a sound bull market into a “mad cow.”

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