People are worrying that the Chinese investors who mortgaged their houses to buy stocks may trigger a new subprime crisis
The Shanghai Composite has collapsed over 30% in the last month and although the government has managed to stop the losses today, it's not clear if this will last given the repeated failures of interventions up until now.
Both Credit Suisse and Bank of America Merrill Lynch are drawing parallels to the 2008 subprime mortgage crisis in the US, saying the panic selling could hit financial institutions and ordinary Chinese citizens.
In fact, in a note sent to clients this week Credit Suisse's Dong Tao and his team raise the prospect that many ordinary Chinese people's houses could be at risk, just as American houses were in the subprime crisis.
Here's Tao:
Why do we argue that systemic risks are approaching? Although hard data may not be apparent, anecdotally we note substantial leveraging up during the first five months this year, amid an extraordinarily steep rise in the stock markets. On top of the forced liquidation of umbrella trust funds, which has pushed the market toward a self-fulfilling downward spiral, we now fear a chain reaction. Some companies and shareholders of companies mortgaged their shares to leverage up to invest in the stock market. Some homeowners mortgaged their house to invest in stocks.
"Some homeowners mortgaged their house to invest in stocks" - that doesn't sound good. If investors bought any time after April they'll currently be sitting on losses at the current levels, or at best be breaking even.
Of course Credit Suisse say Chinese mortgaging their homes to buy stock is "anecdotal." It's not clear how many people have done it, let alone how many of them did it after April. But given the sheer scale of China's stock markets, even if only a tiny percentage of investors have done this it would still be a huge number.
There are an estimated 90 million ordinary Chinese investors in the country's stock markets - so called retail investors. They've played a key part in both the rise and fall of China's markets (you can read why here).
And a huge number of those are recent entrants to the market - a third of China's 258 million trading accounts have been opened in the last 9 months. That increases the likelihood that many will be in the red.
Even if homes aren't the collateral that investors have put up, if markets keep falling millions of Chinese people are going to lose something. Multiple shops have already noted the insane levels of leverage that were propping up China's markets prior to the pop.
Credit Suisse estimated that the figure for borrowed funds invested in the stock exchange reached between 4.4 trillion yuan (£460.1 billion, $708.3 billion) and 5.9 trillion yuan (£617 billion, $949.8 billion) before the pop, according to the South China Morning Post. Citi estimate only 1/4 of those using borrowed money have been forced out of the market - and says there's a lot further to fall.