Leverage risks heightened for Chinese companies in market rout
While margin debt with brokerages stood at 2.2 trillion yuan ($354 billion) in late June, according to Nomura, analysts say money borrowed to speculate on stocks from largely unsanctioned "shadow lenders" such as trusts could have hit nearly twice that amount, taking total debt to up to 20 per cent of free float
Despite reassurances by regulators that margin debt in China’s stock markets remains manageable, total leverage could be as much as US$645 billion - magnifying risks not just for retail investors, but also the thinly stretched corporate sector.
Margin debt, incurred when investors only put down part of the cost of a share purchase, has officially roughly doubled since the beginning of 2015.
That rapid run-up in leveraged trading was brought into sharp focus last week as China’s benchmark CSI 300 index tumbled 14 per cent, raising fears of forced selling that could trigger broader financial instability.
But the official numbers only tell part of the story. While margin debt with brokerages stood at 2.2 trillion yuan ($354 billion) in late June, according to Nomura, analysts say that money borrowed to speculate on stocks from largely unsanctioned "shadow lenders" such as trusts could have reached nearly twice that amount, taking total debt to up to 20 per cent of free float.
"No matter how much you want to borrow, we can give it to you," said a so-called grey market lender based in Shenzhen. "If you want to borrow 100 million yuan for example, we need seven days because we need to issue a (wealth management) product for you. If you want to borrow a few million, we can give you the money right away."
China’s stock markets enjoyed a credit fuelled surge in the first half of the year, rising as much as 150 per cent since November, but have fallen back more than 20 per cent from their mid-June peak.