Money shouldn't be used to inflate asset bubbles

China's stock market has been in the news since the summer, when a rapid rise gave way to a major plunge, triggering a global equities sell-off. The question now is what can be done to prevent further volatility.

In mid-June, the prolonged surge in stock prices finally drove an unnerved China Securities Regulatory Commission to impose restrictions on offline private fund matching. The decision immediately triggered a sell-off, with the Shanghai Composite Index falling 2 percent in just one day.

Initially, this looked like a natural correction. But the prevalence of margin trading caused the decline to turn quickly into a rout. First, as plummeting stock prices caused the equity in investors' accounts to fall below the maintenance margin, brokers began issuing margin calls, forcing investors to offload more assets to come up with the needed cash. When they failed to pay margin calls on time, their shares were sold by brokers, pushing stock prices down further.