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May 24, 2017

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Margin trading drops to lowest in 3 months

CHINA’S monthlong stock market correction has suppressed investor appetite for risk and pushed margin lending to its lowest level in three months, as players tread cautiously amid concerns about economic growth and policy tightening.

Margin lending, wherein investors can multiply their investible funds by using their securities as collateral, dropped 6 percent between mid-April and mid-May in line with a decline of a similar magnitude in China’s main stock indexes.

Current margin trading levels are 60 percent lower than their peaks two years ago.

Investors said the decline in such margin trading was driven both by expectations that the stock markets will stay weak as well as China’s ongoing efforts to rein in excessive borrowing and speculative investment.

Analysts also reckon that China’s regulatory push since the market crash of 2015 has rooted out illegal and excessive margin financing, and thus the decline in such financing wouldn’t be a cause for alarm.

“Margin lending usually is seen as a barometer of risk appetite and sentiment, because it’s used more by aggressive investors,” said Yan Kaiwen, an analyst with China Fortune Securities.

Yan added that the decline in margin lending was highly correlated with the drop in the major indexes.

Margin lending stood at 932.4 billion yuan (US$135 billion) in mid-April, which was when Chinese stocks began sliding, according to data from the China Securities Finance Corp.

As of Monday, the value of the margin loans had fallen 6 percent to 876 billion yuan, the lowest level in three months.

It was not clear how long the sluggishness would last, but investors said it was best to remain cautious.

“For now, I would not like to place more bets by using margin, as the market is still weak,” said a Shenzhen-based investor surnamed Wang.

China’s securities regulator allowed margin financing business for stock purchases in early 2010, and the practice reached a peak of 2.26 trillion yuan in mid-2015 before the market’s spectacular crash.

Only institutional investors and retail investors with 500,000 yuan or more in their share trading accounts can trade shares on margin.

Margin financing collapsed in the aftermath of the stock market crash of mid-2015, during which the Shanghai stock index lost 40 percent of its value in three months, when the government hit on risky financing.


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