Q&A: Why China's stock market plunged 8 percent and the rest of the world shrugged

International Investing Associated Press

Chinese stocks plunged Monday after the country's securities regulator rapped three major brokerages for continuing to lend money for stock purchases in violation of rules. As punishment for extending so called "margin trading" contracts, the brokerages are forbidden to offer credit to new customers for three months.

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— HOW MUCH DID SHARES FALL?

At one point Monday, the Shanghai Composite Index was down 8.3 percent. It later trimmed that to a loss of 7.7 percent. Share prices of brokerages were hardest hit, with some falling by the daily loss limit of 10 percent. Despite the sharp fall, the Shanghai Composite Index is still up 55 percent in the past 12 months and up 33 percent for the past three months.

— WHY DID THE MARKET FALL SO MUCH?

Investors and analysts see the penalties against the brokerages as foreshadowing more curbs on credit-financed trading by China's government. Authorities want to stop the stock market's boom over the past year from turning into a bubble that could damage the broader economy. The Shanghai Composite surged 54 percent last year, partly because of easy credit that investors used to finance their trading. Market selloffs can also become self-reinforcing as other investors sell because of fear they will suffer even greater losses if they do nothing.

— WHY DIDN'T OTHER ASIAN MARKETS FALL TOO?

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Even though Monday's fall was particularly steep, investors in other markets are brushing it off as a situation peculiar to China. The government only allows limited foreign investment in Chinese stocks and the country's financial system is largely walled off to the rest of the world. The exception was Hong Kong, where many Chinese companies have stock market listings. A bigger catalyst for global markets will come Tuesday when China, the world's No. 2 economy, reports fourth quarter growth figures.

— WHAT ARE MARKET EXPERTS SAYING?

"Margin financing is simply overextended," said Dickie Wong, executive director of research at Kingston Securities in Hong Kong. Regulators want to "simply give pause" to the brokerages, he said. "In the past, mainland investors had no clue on margin financing and short selling, but after China introduced these two ways to trade stocks, people became so happy because they can borrow money and just go all in."