China’s high stakes game of whack-a-mole

Chinese stocks, currency and bonds all fell at rapid rates today. The Shanghai Index recorded its biggest plunge since 2009, a 5.4% drop. Tuesday’s fall started after Beijing announced tougher requirements for overnight lending.

“Chinese authorities changed the collateral for some short-term loans that banks can make to other banks," Yahoo Finance Editor-in-Chief, Aaron Task explains. "Basically, meaning you need higher quality bonds if you’re going to make an overnight loan.”

China’s years of borrowing to fuel its growth and the debt it’s accumulated may finally be catching up to the economy, which has slowed dramatically from the breakneck pace of the prior decade. In reaction, Beijing is increasingly fine-tuning its monetary and fiscal policies as the country comes to grips with its slowing growth.

Last month, China’s central bank cut interest rates for the first time in two years to try and curb its slowing expansion and keep the economy afloat. Downward trends in property and marketplace sectors also continue to weaken the economy.

Even with all the signs of slowing growth, stocks had been soaring since the summer. The Shanghai Composite Index is up nearly 50% since July. Chinese authorities started urging retail investors to stop speculating on real estate and invest elsewhere, making the stock market the most viable option. Investors saw the big gains the market was generating and hopped on. “This is a lot of people chasing performance and this is what happens often when you chase the momentum. You have these big down drafts and it was pretty ugly today,” says Task.

Investing in the Chinese market can be highly volatile. As the government takes steps to protect one facet of the economy, another problem seems to pop up in a different sector. Or as Task puts it: "They’re playing whack-a-mole.”