What Was Supposed to Happen in China's Stock Market and Didn't: What's Next?

China's stock market started the week with another icy cold plunge into the deep, despite the central bank's cutting rates - something they said they wouldn't do a month or so ago. The plunge wasn't supposed to happen.

“We expect the cuts to temporarily halt a possible crash in the market -- had the government not acted, a stampede might soon develop as margin calls force leveraged positions to unwind,” David Cui, head of China equity strategy at Bank of America Corp., wrote in a report dated June 28.

The accepted "wisdom" has always been: rate cut; market up. It's almost a knee-jerk reaction. It's not always sustained, but at least at first, that's what usually occurs. One has to wonder how bad things will get now.

“Nobody knows when the market will bottom,” said Paul Chan, the Hong Kong-based chief investment officer for Asia ex-Japan at Invesco Ltd. “The unwinding of margin financing makes it very difficult to forecast what the fair valuation is.”

Margin, or the borrowing of money to buy stocks, was at record levels. Mom and pop accounts were opened in the millions as the Chinese market soared over the past year. Both of which are "bubble" signs. Now all those ordinary Chinese who decided to get rich quick in stocks will take it on the chin. Will the Chinese stock market ever lure them back? It kind of depends on just how bad things get. If these people are wiped out, a la the U.S. markets 1929 crash followed by the Great Depression, it could be decades before the average Chinese buys a stock again.

On the other hand, maybe this crash will be contained - then again, maybe not.

The losses spread to Hong Kong, with the benchmark Hang Seng Index sinking 2.6 percent, while Hong Kong’s Hang Seng China Enterprises Index slid 3 percent.

Still, maybe it will just be a sharp correction, a short bear. Maybe no depression will ensue, despite those who've been calling China's economy a train wreck in the making these last few years. We also note that Chinese do have a certain propensity to gamble. It's no secret. So if those Moms and pops looked at their brokerage accounts as shiny dice or perhaps a more dicey form of pachinko, maybe they only bet their lunch money rather than the ranch.

In any case, just as with the Greek banks closing, the unfolding Chinese stock market crash adds to the fireworks that greet this 4th of July holiday weekend.