New | 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.