It has been a volatile month for Chinese stocks as the margin fueled boom in share valuations was quickly met with a sharp and painful correction for many investors. The Hong Kong Hang Seng Index (HSI) proved not immune from the regional developments with August marking the worst month of losses in 4 years. This marks four-straight months of losses in the key Asian equity index as concerns about the outlook grow amid fears that a global trade downturn has enveloped China. With the latest data confirming a slowdown is in progress combined with a major margin call for investors, the unwind looks like it has just begun, evoking many similarities to the Asian financial crisis of the late 1990s.

The Fundamental Picture

The Hang Seng Index is the flagship benchmark for the Hong Kong Stock Exchange, comprised of 48 stocks that represent the majority of the market capitalization of the exchange. Constituents of the index are picked based on a variety of criteria, namely market value, trading volume, and listing history. While the Hang Seng was among the best performers of 2015 for the first quarter of the year, around the second quarter conditions began to shift, beginning in April when the index peaked. Since then, concerns about the Chinese economy and the prospect of higher interest rates in other developed economies have taken their toll on the index’s valuation, seeing a massive correction that wiped away two years of gains in a very short time span.

Much of the gains attributed to the index in the past year came on the back of momentum fed by the retail trading community. China saw an unprecedented number of new retail trading accounts opened over the past year as liberalization of the stock market combined with a crackdown on gambling in Macau saw individuals shift their attention. However, the massive uptick in retail brokerage accounts was accompanied by an epic expansion in margin trading debt which fed the rally that invariably saw the Hang Seng soar after the middle of March. While many investors spent time cheering the gains and ordinary retail investors chased after a market with tremendous momentum, for many of these newly minted traders, the story ended in tears.