Chinese stocks have taken the biggest plunge since 2007. Chinese stocks sank the most in five months, leaving the benchmark index on the cusp of a bear market, after leveraged investors cut holdings and Morgan Stanley joined a chorus of analysts warning that valuations have climbed too far. So how did this bubble develop in the Chinese Stock Market? Chinese economy has been overheating for the past few years while the government has been encouraging the ordinary Chinese to load up on shares. This buying pressure was fueling the rally. Now analysts say the flood of new shares is overwhelming the market and helping to push prices down. Moreover, the government began to worry the market had reached dangerous levels, and Chinese regulators have started to tighten rules on margin lending. However the impact of this stock plunge in China is being viewed as limited.
Now the same thing can happen to the US Stock Market. Ron Paul is predicting that the day of reckoning for the stock market is coming in the US also.
Federal Reserve has been flooding the economy with cheap money in an effort to stimulate the economy. Most of this cheap money has found its way into the stock market. This cheap money has been propping up stock prices. But the party cannot go on forever.