China needs to be wary of rapid rebound in stock market leverage, analysts say
China’s margin-financing balance rose for 16 out of the past 17 days as of Wednesday, as recent stock market volatility and the latest tightening of margin financing rules seem to fail to quell investors’ speculative interests.
Analysts said investors have regained confidence in capital markets, but a rapid rebound in leverage and quick expansion of speculative trading may pose great risks to the markets, and China may need to improve its regulatory and supervising schemes to ensure investor confidence in long-term investment.
The outstanding value of China’s margin loans and short-selling hit a fresh three-month high of 1.2223 trillion yuan on Wednesday. On Monday, the balance decreased slightly from the previous day to 1.218 trillion yuan.
As of the end of last week, the balance of the margin financing reached 1.2208 trillion yuan, up for a 14th day in a row. It was the longest stretch of increases in seven months. The margin finance balance as of Friday has already accounted for 2.93 per cent of A-shares’ free-float market cap, “approaching the alarm level of 3 per cent”, Shenyin Wanguo Securities said in a note on Tuesday.
The rapid increase in market leverage, which fuelled the dramatic boom and bust in the stock market earlier this year, have raised alarm bells among regulators.
Earlier this month, Shanghai and Shenzhen stock exchanges announced they will cut by half the amount that retail investors can borrow to purchase stocks, effective on Monday，in a move to rein in speculative trading and prevent systemic risks.
The new rules indicated that Beijing has “learnt lessons from the market correction in June” and worried about the rising leverage in A-shares markets, J.P. Morgan said in a recent report.
Analysts said the authorities hope to cool down the speculative frenzy, but doesn’t want to kill a bull market, as the regulators just resumed initial public offerings which reduce the financing costs for indebted Chinese companies given the slowing economy.
“The policy is mainly aimed at adjusting the pace of the markets and promoting a slow and long bull,” said Xu Fei, an anlyst for Sinolink Securities.
But the tightening of margin financing rules seem to fail to quell investor enthusiasm. After a brief drop in the margin-finance balance on Monday, investors kept increasing their leveraged wagers and pushed the margin-finance balance back above 1.22 trillion yuan.
According to the data, margin lenders favour smaller-cap stocks, as margin-finance balance in Shenzhen markets, which are dominated by small and medium-sized companies, increased by 2.7 billion yuan from the previous day to 494 billion yuan as of Tuesday, while the balance in the Shanghai market decreased slightly to 727 billion yuan.
“It may be hard for the authorities to constrain rising leverage in a short run, as Chinese investors have regained confidence toward the markets and have a high interest in borrowing money to invest,” Shen Meng, an executive director at Chanson Capital, said earlier this week in a radio interview by China National Radio.
“Ordinary investors expect stock prices to rise fast in a bull market, although regulators hope to see a paced increase,” he added.
However, analysts also warned that a rapid expansion of speculative trading may pose great risks to the markets, as there is no significant improvement in economic fundamentals yet.
The economy continues to face downward pressures, as industrial production saw a further slowdown in growth and exports continued to decline in October, analysts from Haitong Securities said.
“China’s real economy lacks money, although there is ample liquidity in the market, “ Jiang Chao and Gu Xiaoxiao, analysts for Haitong said in the note, adding companies are less willing to invest amid sluggish demand.
Analysts said the authority needs to fine tune the economy through policies and deepen its financial market reforms, including improving the regulatory and supervising schemes, to ensure investors’ confidence in making long-term investments.
“The authorities should improve the system and strictly supervise the margin lending business, to ensure a healthy development of the stock markets in the long run,” said Xu from Sinolink Securities.