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China stock crash 2015: the boom built on borrowed money
In a year, Shanghai stocks rose about 150%. Millions of new investors piled in, many with borrowed money. Then, from 12 June 2015, the market lost nearly 40% in ten weeks.
The world before the crash
In mid-2014, Chinese stocks were quiet. Then they started to climb, and kept climbing.
From late 2014 to early June 2015, the Shanghai Composite index rose roughly 150%. State media cheered the rally. New trading accounts opened by the millions.
Many of the new investors had never traded before. The rally felt like proof that stocks only go up.
The fuel: borrowed money
Here's what made this boom different. Much of it was bought with borrowed money.
Brokers lent customers cash to buy more shares. That's called buying on margin. Official margin lending grew from about 403 billion yuan in June 2014 to about 2.2 trillion yuan in June 2015.
There was also a lot of borrowing outside the official system, which was harder to measure.
Margin works both ways. When prices rise, gains grow. When prices fall, the broker can demand more money or sell your shares for you. That's a margin call.
What happened
The peak and the first drop
The Shanghai Composite peaked on 12 June 2015, above 5,100 points.
The same weekend, regulators moved to rein in margin lending. Prices began to slip.
Then the slip turned into a slide. As prices fell, margin calls forced sales. Forced sales pushed prices lower. Lower prices caused more margin calls.
Within about three weeks, the index had lost roughly 30%.
The rescue
The government stepped in hard, by most reports in ways no big market had seen before.
- Big state-backed funds, nicknamed the "national team", bought shares.
- Large shareholders were banned from selling for six months.
- Hundreds of companies halted trading in their own shares. At one point, by most counts, about half of all listed stocks were frozen.
Prices steadied for a few weeks.
The second wave
On 11 August 2015, China's central bank lowered the value of the yuan by about 2%. It was the biggest move in years, and it shocked markets around the world.
On 24 August 2015, the Shanghai Composite fell about 8.5% in one day. Chinese media called it "Black Monday". It fell about 7.6% more the next day.
By then, the index was down about 38% from its June peak.
The moment everyone remembers
Regulators wanted to stop days like 24 August. So they built a circuit breaker, a rule that pauses trading after a big fall.
It started on 4 January 2016, the first trading day of the year:
- A 5% drop in the CSI 300 index would pause trading for 15 minutes.
- A 7% drop would close the market for the rest of the day.
On that very first day, stocks hit 5%, paused, reopened, and then hit 7%. The market shut early.
On 7 January, it happened again, this time within about half an hour of the open.
Many traders said the rule made things worse. As prices got close to 5% or 7%, people rushed to sell before they were locked in. The circuit breaker was suspended after just four days.
What it teaches
1. Borrowed money speeds up both directions
The rally was fast because of margin. So was the fall. When many people borrow to buy the same thing, a small drop can force a big wave of selling. Read leverage and margin explained before you use any.
2. "Everyone is getting in" is a feeling, not a reason
The fastest part of the rally pulled in the most new money, right before the peak. That pull is FOMO, the fear of missing out. Our FOMO trading guide has a simple pause to use when a move feels urgent.
When a market has gone straight up and everyone you know is talking about it, write down your stop and your size before you buy. If you can't, don't buy yet.
3. A halt can trap you
When half the market's stocks were frozen, people who wanted out couldn't sell. They sold whatever they could instead, which spread the selling. A trading halt doesn't remove risk. It moves it.
4. Decide your exit before you enter
A stop set from the chart, and a size worked out from that stop, keeps one bad week from becoming a disaster. Use the position size calculator and read how to set a stop-loss.
What it doesn't mean
- It doesn't mean circuit breakers never work. The US has used market-wide circuit breakers since after Black Monday 1987, with wider levels. China's version had levels very close together.
- It doesn't mean China's market can't be traded. It means a market full of first-time, borrowed-money buyers can move very fast.
- It doesn't mean governments can stop a fall. The rescue slowed it for a while. The second wave came anyway.
- It doesn't mean anyone could time it. Some people sold early and watched prices keep rising for months before the peak.
Timeline
| Date | Event |
|---|---|
| Mid-2014 | Rally begins; margin lending starts to surge |
| Jun 2015 | Official margin lending reaches about 2.2 trillion yuan |
| 12 Jun 2015 | Shanghai Composite peaks above 5,100 |
| Late Jun–early Jul 2015 | Index falls roughly 30%; government rescue measures begin |
| 11 Aug 2015 | Yuan devalued by about 2% |
| 24 Aug 2015 | Shanghai falls about 8.5%; down about 38% from the peak |
| 4 Jan 2016 | New circuit breaker triggers; market closes early |
| 7 Jan 2016 | Market closes early again within about half an hour |
| 8 Jan 2016 | Circuit breaker suspended after four days |
Questions
What caused the 2015 Chinese stock market crash?
A fast rally fuelled by borrowed money ended when regulators tightened margin rules and prices slipped. Forced selling from margin calls then pushed prices down much further.
How much did the Shanghai stock market fall in 2015?
The Shanghai Composite fell about 38% from its 12 June 2015 peak to 24 August 2015, after rising about 150% in the year before.
Why did China stop its circuit breaker in 2016?
It triggered on its first day and again three days later, closing the market early both times. Many traders said the 5% and 7% levels were too close, so people rushed to sell before trading stopped.
What is the "national team" in Chinese stocks?
It's a nickname for state-backed funds and institutions that bought shares to support the market during the 2015 crash.
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