FXStreet (Bali) - Sacha Tihanyi, Senior EM Strategist at TDS, notes that the likely main culprit for the selloff in Chinese stocks was jitters ahead of the January 8th lapse on the ban in short-selling. Key Quotes "The official start of the year has been unkind to Chinese risk assets as equity markets melted down by 7% to trigger the ’circuit breaker’ trading halt on January 4th. The likely main culprit for the selloff is jitters ahead of the January 8th lapse on the ban in short-selling that was put in place during the equity meltdown of this summer." "Though there were also weak PMI prints released in recent days (official on the 31st and private sector on the 3rd) that likely didn’t help matters, they were not the key equity market drivers. Nevertheless, the PMI reads do not bode overly well for a significant shift in the growth dynamic in China, a fact corroborated by our additional statistical analysis." "The upcoming lapse in the short-sale ban has contributed to market jitters, and while we’d expect further negative volatility for Chinese equities this week, we don’t expect to see a repeat of the summer in terms of depth or duration of selloff. Today’s selloff and the risk of a repeat of the summer’s blood-bath must be evaluated in terms of stock market leverage, both then and now." "The summer 2015 equity route was a direct consequence of the massively leverage-driven equity run-up over the course of Q3 2014 though mid-June 2015. With the equity market the one ‘good news’ story going in China during early 2015, policy makers, while cautioning somewhat on the degree of leverage, were implicitly endorsing the equity price inflation which had the effect of further encouraging leverage in the market. It was the kind of market such that if you stepped into a taxi in any random city in China, you’d likely have the driver giving you stock tips, and maybe even something that your grandmother hadn’t already been telling you at dinner the night before." "Total equity margin outstanding peaked at RMB 2.27 trillion in mid-June, having grown by 460% (or RMB 1.86 trillion) over the previous 12 months (since June 2014), with a massive RMB 1.12 trillion of that coming in only the 3.5 months before the sell-off. This compares with only about 180 billion of margin leverage growth in the 12 months before June 2014. Obviously trouble was brewing. Margin outstanding collapsed along with Chinese equites as one would expect, with margin liquidation acting as a key factor in driving the depth and rapidity of the equity meltdown." "We’ve had somewhat of a rebound in margin outstanding since the stabilization, and while it isn’t as frothy as was the case last year, it is at a level that may exacerbate downside volatility in Chinese equities if we see further consecutive daily losses in the 4%-7% range." "However, we do not see equities collapsing by another 40%-plus as was the case during the summer, and we’d probably see some degree of psychological support at 3000 in the Shanghai composite on any sustained selling. The message is that leverage is still abundant, but not dangerously so as had been the case during 2015." For more information, read our latest forex news.