Shenzhen margin financier’s 5-for-1 funding goes some way to explain why a sense of deja vu is filling China’s stock market rally

Yale Sun, who quit an investment bank to set up his private-equity fund in Shenzhen, has found the mother lode of quick-gain investments in China: providing margin financing to investors who are desperate to plunge into this year’s best-performing global stock market.

His fund provides 5-for-1 financing, lending an investor with 1 million yuan (US$149,273) a loan of up to 5 million yuan, with 1.3 per cent monthly interest. The money is deposited into a brokerage account jointly managed by the fund and the borrower for trading in the stock market, said Sun, declining to name his fund because he is operating in an unlicensed and thinly regulated grey area.

“This is essentially a kind of private loan between the lender and the borrower, which is hard for the regulator to trace,” said Hu Hongwei, partner of a law firm Dentons in Shanghai. “Platforms facilitating the match makings would be held accountable.”

It may also be borderline illegal, as the fund’s lending platform is not licensed by China’s banking laws to distribute loans or provide margin financing of that magnitude. The frenzy of financing may be giving China’s securities regulator Yi Huimang – two months into his tenure – a case of déjà vu, as it mirrors the debt-fuelled lending that paved the way for the country’s worst stock market in decades three years ago under his predecessor’s watch.

Still, everybody is piling into the Shanghai and Shenzhen stock markets, urged by investment bank economists who play up signs of an easing trade war between the US and China, while projecting confidence that the Chinese economy may have found traction after sliding to its slowest growth pace in decades.