China finally woke up after almost $3 trillion in market cap got wiped out from the Shanghai and Shenzhen stock exchanges. The Chinese markets are crashing on a daily basis, as individual investors get margin calls. For those who is not familiar with trading stocks on margins, an individual investor would receive a margin call from a broker if one or more of the securities they had bought with borrowed money decreases in value past a certain point. 

If investors don’t respond to the margin call, the broker can automatically sell those securities and keep the money, meaning forced selling. 

China is attempting to put a floor on the markets by cutting the benchmark rate, suspending the IPOs, as well as permitting Chinese margin traders to use real estate as collateral, meaning if individual investors get a margin call, they could be at risk of losing their home to a broker. So far, nothing has worked.

It looks like the Shanghai SSEC is heading downwards to 3,561.14, or the 50% Fibonacci retracement level. The index could bounce from there, or else there might be another 600 points drop. Here is what Bank of America Merrill Lynch’s David Cui said, “We expect the A-share market to rebound somewhat in coming days, especially large cap names. If that happens, we suggest investors sell into the rally, especially brokers”.