China's stock market crash, explained China's stock market has been plunging over the past month, and the Chinese government is panicking. Over the past week it has employed a number of extraordinary measures to try to halt the market's slide, to little effect. On Wednesday, the benchmark Shanghai Composite index fell another 5.9 percent, bringing the market's total losses to 32 percent in less than a month. The question is whether the plunge is just an ordinary correction after a year of big gains, or if it's the first sign of deeper problems in the Chinese economy. Chinese stocks surged last year, but those gains didn't reflect broader economic gains. Rather, they were a result of more and more people investing in the stock market with borrowed funds. That has created instability and a danger that many investors will suffer outsize losses as the market falls. Investing borrowed money used to be heavily restricted in China, but the authorities have gradually loosened the regulations since 2010. Over the same period, Chinese people found increasingly creative ways to evade these rules. The last month's stock market declines follow efforts by Chinese authorities to rein in this kind of speculative investment. But in the past week the government reversed course and began trying to boost stock prices again. China's current predicament bears some resemblance to the situation in the United States in 2007. Risky, poorly regulated financial investments have proliferated in China, creating the danger of a meltdown that spreads beyond the stock market to the broader Chinese economy. Yet China's stock market isn't as big, relative to the Chinese economy, as in developed countries, so the panic might not spread to the economy as a whole. Investors used borrowed funds to push up stock prices The Shanghai Composite index fell 5.9 percent on Tuesday to 3,507. That's down 32 percent from the June 12 high of 5,166. Still, the Shanghai Composite index is 70 percent above its level a year ago, when China's most recent stock market boom began. The latest boom in China's stock market is different from one that came before it. The earlier boom from 2005 to 2007 coincided with rapid growth of the Chinese economy; when the Chinese economy slowed in 2008, the stock market plunged along with it: (MarketWatch) It's not surprising to see stocks go up in good economic times and down during economic downturns. But that's not what happened in the latest boom. The stock market rise that began in mid-2014 coincided with economic growth that was slowing. A big reason for the stock market rally was that a lot more people started buying stocks with borrowed money. This practice, known as "trading on margin," used to be strictly regulated by the Chinese government. But as the Financial Times explains, Chinese authorities have gradually relaxed these requirements over the past five years. The new rules still included an important safeguard, though: a 2-to-1 margin requirement said that only half of invested funds could be borrowed. The investor needed to put up the rest of the funds herself. There were also restrictions on which stocks you could buy and how long the money could be borrowed — rules designed to prevent speculative mania from getting out of hand. People also found a number of creative ways (detailed in a helpful May report from Credit Suisse) to evade these requirements. As a result, many people have been able to make even riskier bets than the official rules allow. So borrowed money flooded into the Chinese stock market between June 2014 and June 2015, helping to push stock prices up 150 percent. During this period, the amount of officially sanctioned margin trading in the Chinese stock market ballooned from 403 billion yuan to 2.2 trillion yuan. And that figure doesn't take into account the vast sums invested through back-door methods. http://www.vox.com/2015/7/8/8908765/chinas-stock-market-crash-explained Almost 3 Trillion are lost in the stock market because of the fall, Close to 90 Million middle class are affected by this crash. This is mainly due to lack of knowledge of the chinese middle class while investing in stock markets. China is trying to move from a manufacturing based economy to consumption based . This event is a blow to Chinese economic plan.