Market Extra: China investors fear too much stock is being used as collateral, a big market drag

As stocks in China plumb new lows, global investors can be forgiven for feeling some jitters as they recall the ripples sent through global financial markets by the country’s steep selloff in 2015.

One factor that made that plunge worse, analysts recall, was forced selling by traders who loaded up on leverage, pushing margin debt to a record ahead of the crash. This time around the concern centers on companies and shareholders that have pledged stock as collateral for loans. As in 2015, that runs the risk of kicking off a vicious cycle, in which falling stock prices leads to forced selling as pledged shares are liquidated, in turn leading to further falls in stock prices.

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