China Market Crash 2015

After more than doubling over the prior year, the Shanghai Composite peaked in June 2015 and lost roughly 30% over the following months. The decline was amplified by a sharp surge in margin lending to retail investors during the run-up. In August, the PBOC unexpectedly devalued the yuan by approximately 2% in three steps, prompting a brief but severe risk-off move in global markets. The S&P 500 fell roughly 12% in late August in what was effectively a brief growth-scare correction, before recovering most of the loss into year-end. Commodities and emerging markets, however, continued to fall through into early 2016.

• US Treasuries and US dollar assets benefited from the safe-haven and currency-divergence trades.
• Defensive US sectors (staples, healthcare, utilities) outperformed during the August correction.
• Long-volatility positions and equity puts that had been cheap going into August paid off quickly.
• Cash — the correction was short enough that a small allocation to dry powder allowed rebalancing into equities at lower prices.

• Mainland Chinese A-shares purchased on margin — forced deleveraging extended the drawdown.
• Commodity-linked equities (energy, mining, materials) — already weak, accelerated lower as China-demand expectations fell.
• Emerging-market currencies and equities, particularly commodity exporters (Brazil, South Africa, Russia).
• Carry trades funded in low-yielding currencies that unwound during the volatility spike.

• Leverage amplifies both directions of a move. The Chinese equity rally was a margin-fuelled rally and the decline was a margin-call decline; the two faces of the same mechanism.
• A currency move from the world's second-largest economy reverberates immediately through risk markets, even when the move itself is small in absolute terms.
• Short, sharp corrections without a recession recover quickly. The 2015 episode looked terrifying in real time but was retrospectively a buying opportunity for diversified equity investors.