China’s current stockmarket craze is generating a debt bubble estimated at 1.6 trillion to 1.7 trillion yuan. Analysts have expressed alarm at the huge level of borrowings by mainland retail investors to buy mainland shares, warning they may suffer if a likely correction hits. Over the past 12 months, the Shanghai Composite Index has doubled to record levels not seen since 2008. Since March, the Shanghai Composite Index has risen by roughly a third. “Worryingly, leverage has also risen over the course of this rally. Margin loans outstanding in Shanghai and Shenzhen reached 1.6 trillion yuan, two and a half times higher compared to six months earlier,” said a Barclays report. “It pays to err on the side of caution. China retail investors opened nearly 5 million trading accounts in March alone, a stampede that has continued into April. A survey by China’s Southwestern University of Finance and Economics found that two-thirds of new investors last year did not complete high school. Hence, there are valid concerns that these risky bets could turn sour for these inexperienced retail investors, thereby disrupting the current rally,” Barclays explained. Goldman Sachs estimated mainland margin financing is now equivalent to 1.6 per cent of China’s GDP last year. A Macquarie Research report added: “A-share margin positions have reached levels that exceed historical bubble peaks elsewhere. Yet it very well might go higher.” As of April 16, margin positions in the mainland reached 1.7 trillion yuan, which is 64 per cent higher than the beginning of this year and a year-on-year increase of 321 per cent, according to a Macquarie’s estimate. For the Shanghai and Shenzhen bourses, long margin positions have soared to 3.2 per cent of market capitalisation from 1.9 per cent in the third quarter last year, higher than that of the US during the dotcom bubble in the late 1990s and Japan at its peak, said Macquarie. “The real leverage is much higher.” Excluding the government-owned shares and counting only the free float in the Shanghai and Shenzhen stock exchanges, the margin to market capitalisation in China is actually 8.2 per cent, higher than any known example in history, Macquarie said. “The data should be a concern, if not downright scary.” The resurgent equity markets could continue for a while, and margin finance may continue rising, Macquarie predicted. The trend should be positive for the brokers, assuming they maintain control of counterparty risks, collateral values, and compliance risks, although their retail clients might well suffer, Macquarie warned. “The market experience that followed peak exuberance levels in historical examples teaches us that the unwinding is not always particularly pleasant. If and when these positions unwind, it may not be an enjoyable process for anyone except short-sellers.” This is reminiscent of the “greater fool theory” during the dotcom bubble, when investors bought and sold shares to “greater fools” as stock prices kept soaring to increasingly insane levels, but the ones holding the stocks when the bubble burst in 2000 were left with the losses. Given that millions of mainland retail investors are vulnerable to losing money if the current rally corrects, Beijing, which is ever concerned about social instability, is doubtless watching the situation carefully.