Chinese stocks fell sharply on Tuesday. The catalyst was a call by bank regulators to raise more capital. Chinese banks will be required to raise $43 billion in new capital. Regulators have asked big banks to formulate plans for raising this new capital.
Bank lending in China surged this year, with some of this capital fueling the surge in Chinese stock prices. The Shanghai Composite hit a three-month high on Monday, up 77% for the year.
Then came the news that Chinese banks' capital reserves were too low and they must raise more capital. The Bank of China fell 4%, while the Chinese Construction Bank fell 3.4%;
The sell off accelerated when investors decided to cash in their profits. This pushed the Shanghai Composite Index down 3.5% to 3,223.526.
Whether this is a one day blip or whether it will lead to further losses is unclear. What is also unclear is how much the sell off will carry over to European and U.S. markets.
Do you believe that this is good time to take some profits?
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