Portfolio | Leveraged positions worth 300 billion yuan could unwind on A-share roller coaster, HSBC warns
The next shoe to drop on the A-share market roller coaster could be roughly 300 billion yuan worth of leveraged positions that could rapidly unwind, according to calculations by HSBC.
“Margin financing was the primary market driver on the way up, and it will be a key driver on the way down as well,” HSBC equity strategists led by Steven Sun said in a research note on Monday.
Sun said that as A shares decline, most of those positions will be forced to close, triggering a further drag on the Shanghai Composite Index. He expects the positions to be closed will total 300 billion yuan.
Margin financing was the primary market driver on the way up, and it will be a key driver on the way down
And that does not include over-the-counter financing, which the mainland media has estimated at more than a trillion yuan. Half of those positions might have been liquidated last week following a correction which has dragged Chinese markets into bear territory since the peak of June 12.
Money managers will be paying attention to the amount mainland Chinese have borrowed through margin financing to buy A shares.
If they’ve borrowed too much, monetary stimulus such as the weekend cuts in interest rates and bank reserve ratios announced by Beijing will not stop investors from having to further liquidate their positions.
The margin financing balance on the A-share market hit a peak of 2.27 trillion yuan on June 18, according to HSBC. Those bets were, on average, placed 6 per cent higher than the prevailing market in May and 14 per cent higher in June.