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Panic in Chinese market; stocks lose $2.8 trillion in value

Investors panic set in when China’s main market plunged on Friday and $2.8 trillion in value of Chinese companies was erased during the fall. This drop follows the longest bull market in the nation’s history.

The Shanghai Composite — the world’s third largest stock exchange — fell 5.8 percent, bringing the decline since its peak to 29 percent, reports Bloomberg Business.

Chinese authorities’ attempts to bolster investor confidence have failed to halt the selling frenzy since the market peaked on June 12.

The authorities had cut fees and eased borrowing rules that make it cheaper to buy shares and promised to investigate potential market manipulation. These efforts failed to stop the market slide.

Analysts have theories why the market boom has abruptly disappeared. CNN Money explains share prices outpaced economic growth and company profits are lower than they were a year ago.

Stock values could fall further

Traders indicated that the market rout would extend into next week and maybe longer, reports The Guardian.

Chris Weston, analyst at IG Markets, told ABC News Australia that efforts by Chinese authorities to stem the falls have not worked so far.

Booming Chinese share markets over have been driven by the popularity of margin loans in China, loans taken out by investors to buy shares, a move encouraged by the Chinese government to develop equity markets.

“We’re even hearing now that they are allowing people to use housing as collateral for financing, so you can really bet your house on the stock market, which sounds like it could end very much in tears,” Weston said. “The stock market for me looks like it can go lower.”

As reported by The Economist, Goldman Sachs calculates outstanding margin debt, at 2.2 trillion yuan ($355 billion) earlier this week, equaling 12 percent of the value of all freely traded shares on the market, or 3.5 percent of China’s GDP.

Even more troubling are Chinese shadow banks and peer-to-peer lenders passing money to investors, which creates hidden leverage in the market, which analysts estimate to be as much as 50 percent higher.

That debt helped fuel the bull markets. Now, that debt creates problems, as investors rush to sell their holdings to cover their debts.

A stock market crash would hurt the Chinese economy, as it did in the last downturn in 2007.

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