Here's what might have caused last Friday's plunge in Chinese stocks

Partially explaining the 6.4% plunge on the Shanghai Composite, Chinese investors reduced leveraged positions in stocks for the first time in a month on Friday.

According to a report from Bloomberg, outstanding margin debt used to fuel share purchases fell to 1.479 trillion yuan on Friday, lower than the record high level of 1.483 trillion recorded during the previous trading session and the first reduction since May 22 this year.

According to Bernard Aw, a strategist at IG Asia Pte Limited in Singapore, tighter restrictions on margin lending requirements from brokers may have contributed to the sharp decline in Chinese stocks last week.

“The drop in margin debt is a reflection of the tightening margin financing measures undertaken by Chinese brokers and authorities. It is possible that some of the unwinding of margin debt contributed to the selloff. Much also is possibly due to the herd mentality of retail investors,” he said.

According to Bloomberg, several brokers have recently raised margin requirements in order to reduce risks stemming from the increased use of leverage to finance share purchases.

Last month the RBA noted that outstanding margin debt over Chinese stocks had quadrupled from July 2014. According to the bank purchases, involving margin debt increased 10 fold over this period and equated to an average 15% of total daily turnover.

Last week the Shanghai Composite slumped 13.3% — the largest weekly percentage decline since June 2008.

The decline saw $1.3 trillion wiped off the value of Chinese stocks, greater than the total value of Australian listed stocks.

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