Editors note: Investors across China put their money into the Chinese stock market last year and this year largely because of promises by official media outlets. People’s Daily and other publications reported that the Chinese bull market would help to realize the great rejuvenation of the Chinese nation, the much-vaunted “China Dream.” Beginning last December, the writer of this article, a senior journalist with the publication China Business News, joined a QQ chat group of high-end stock market speculators. Many in this group borrowed up to 10 million yuan (US$1.62 million)—several times their own capital—to speculate with. This is the story of how they lost everything in China’s market crash. This is an abridged translation of Zhou’s July 18 opinion piece, which was shared widely on the Chinese Internet.
“This is the slaughter of the middle class,” Mr. Hao, a financial investment adviser in Chengdu, said on July 15. “Of my friends, even those who have borrowed the equivalent of their cash, at a 1:1 ratio, have received margin calls from their financial firms. They lost the entire wealth they accumulated in the past 10 years. We estimate that at least 500,000 to 600,000 middle-class investors have been eliminated in this round of the stock market plunge!”
The Chinese stock market crash that started in mid-June purged the wealth of investors who used margin accounts, borrowed money with securities as collateral, to invest in the stock market. During the previous six plus months, they had been in a state hyper-excitement as the Shanghai Composite Index more than doubled from Aug. 1, 2014 to June 12, 2015, while the Shenzhen index nearly tripled.
Now, however, they’ve lost more money than the combined amount of their own cash and what they had borrowed. The market cleaned out this investor group in the most violent way.
I was a witness to this slaughter. In December 2014 I joined an investment chat group on QQ, a popular Internet platform, called High-End Dragon Margin Group (we’ll just call it Dragon Group). The two principals who set up this group in central Hunan Province go by the monikers “Dragon” and “Gone-with-the-Wind.” The group also has a stock market celebrity, “Dao,” who lives in Southeast Asia. These three are the key members of Dragon Group, and they attracted quite a large middle-class following.
“Gone-with-the-Wind” told me that Dragon Group was set up in 2014 as a small and medium-sized loan company with 150 million yuan ($23.3 million) in capital. At that time, A-Shares—Chinese domestic stocks—were going up, and each day more people joined the group. Most of them had borrowed over 500,000 yuan ($81,000). Some large customers borrowed 5 million—10 million yuan ($810,000–$1.62 million). The ratio between their own capital and loans was generally 1-to-4.
Big Losses in Early July
However, since mid-June the group suffered losses. Big losses were incurred on July 2 and July 3, according to “Gone-with-the-Wind.” But many customers had been optimistic about Beijing’s announced rescue measures and thought the market would come back.
On the evening of July 1, China’s Securities and Regulatory Commission released three reassuring announcements that the market would come back. But the market did not buy it. On July 2 and July 3, the Shanghai stock index fell 3.48 percent and 5.77 percent, respectively.
Continued decline caused huge damage to the Dragon Group. On July 3, nearly 20 accounts in the Dragon Group were at or close to the point of getting margin calls—demands to sell shares or put up additional funds because of adverse price movements.
Most people in the group fell silent during the next several days after the crash.
July 9 Plunge
A-Shares declined sharply after opening on the morning of July 9. Investors were seriously hurt again. “Steel” advised people to pay attention to their accounts as the information changed so quickly.
The sharp decline on July 9 ended many investors’ last hope. Lots of customers in the Dragon Group were forced to sell.
Mr. Hao’s friends who had borrowed the equivalent of their cash, at a ratio of 1:1, were forced to sell during the crash on July 9. Most investors were not able to raise more money, and their dozens of years of savings were gone, he said.
Since the June crash, the use of margin account loans has caused trillions of yuan to evaporate, hundreds of thousand of yuan per person. Those who borrowed on margin, whether from established brokers or shadow lending firms, especially, suffered a lot.
Forbes once estimated that China’s investing middle-class, defined as those with cash to invest of $96,480 to $964,000, would become 14 million strong at the end of 2014. If 500,000 to 600,000 of them are gone, then the crash wiped out 3 percent of that group.
The stock capital borrowing business expanded extensively, driven by greed, with the last round of bull market. According to “Gone-with-the-Wind” this type of business began in 2007, although it was only allowed for individual accounts back then. There was nothing like the new systems that can automatically manage thousands of accounts.
With the crash of A-Shares in 2007, stock capital borrowing disappeared. But in early 2014, this business slowly picked up again. The convenient HOMS system, to better manage large numbers of accounts, also became available. Margin companies allowed customers to directly conduct high risk transactions through their accounts. Before the end of 2014, many companies allowed speculators to borrow five times as much money as they had.
The capital borrowing company that “Gone-with-the-Wind” was involved in, acquired more and more customers in 2014. According to his analysis, outside capital was about 1 trillion yuan ($162 billion) around May 2015, much higher than the 500 billion yuan ($81 billion) stated by some securities firms.
I contacted many margin lending firms and learned that in the stock market crash, 80–90 percent of clients at most of the companies, and even 100 percent in some companies, lost their investment capital.
More than 50 percent of customers at Dragon Group lost their own capital under its strict risk control. Shanghai Investment celebrity Mr. Xia said, the last round of the bull market had attracted many old investors. They all lost money; some of them even lost over 1 billion yuan ($162 million).
Capital borrowers were forced to sell part or all of their stock. They were also accused of being the main reason for this last crash. Previously, it was said the main reason for the crash was the HOMS system by Hundsun Technologies, which can control the buying and selling of thousands of accounts. Some even pointed to Hangzhou, a city on China’s eastern coast and Hundsun’s headquarters, as ground zero of this disaster. Others refuted this point of view.
According to “Gone-with-the-Wind” this kind of accusation is just shifting the blame. In a bull market, adjustments are inevitable. But the lack of coordination of the government’s damage control accelerated the losses suffered by capital borrowers, he said.
Zhou Yuanzheng is a senior journalist with China Business Times and a noted columnist.