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November 14, 2015

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Margin trading deposit to double

CHINA will double the deposit required for investors to borrow funds to trade stocks — known as margin trading — the Shanghai Stock Exchange said yesterday, as authorities seek to limit a practice that created a massive market bubble.

Both the Shanghai and Shenzhen stock exchanges will increase the minimum requirement for margin trading to 100 percent from 50 percent, the Shanghai bourse said on its official microblog. That means investors must have the same level of funds in their accounts as the amount they want to borrow.

Margin trading fueled a rally that lifted the Shanghai Composite Index 150 percent in a year, before it crashed in June.

The notice of the new limits came as the Shanghai market rebounds, with the benchmark index now up 22 percent from its recent low in August.

“The regulators want margin trading to increase in an orderly manner,” Wu Kan, a Shanghai-based fund manager at JK Life Insurance, told Bloomberg News.

Margin trading, a practice through which investors only need to deposit a small proportion of the value of their trades, potentially generates bigger profits but also exposes them to bigger losses.

“In order to realistically protect investors’ legal rights and prevent systemic risks, it is necessary to ... lower leverage appropriately in order to push the healthy and sustainable development of the market,” the exchange said in its statement.

The outstanding balance for margin trading of the Shanghai and Shenzhen markets combined had surged nearly 30 percent to 1.17 trillion yuan (US$184 billion) as of Thursday from the end of September, data showed.

The Shanghai market closed 1.43 percent lower yesterday before the announcement.

“While in the short-term this decision could impact the equity market, in the mid- to long-run it would help decrease volatility,” Gerry Alfonso, a sales trader at Shenwan Hongyuan Group in Shanghai, told Bloomberg News.


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