China’s margin-trading binge more to do with state-owned enterprises than mom and pop

Households not all to blame for sell-off in stock markets

PUBLISHED : Monday, 06 July, 2015, 5:20pm
UPDATED : Monday, 06 July, 2015, 7:35pm

The trigger for the spectacular sell-off from the speculative frenzy that drove mainland stock markets to seven-year highs is broadly being pinned on China’s 90 million mom and pop retail investors.

Popularly painted as margin-funded, leveraged-up drivers of 80 per cent of typical daily turnover, they are an easy target given the surge in official margin financing to 2.3 trillion yuan (HK$2.87 trillion) in June, just as markets peaked, crested and began to fall.

The reality of the exposure of China’s household sector to the equity market – and consequently its impact on prices – is significantly smaller than those headline numbers imply.

Yao Wei, chief China economist at investment bank Societe Generale, reckons equity investments account for about 6 per cent of total financial assets held by mainland households, versus about 10 per cent in Japan, 17 per cent in Europe and 34 per cent in the United States.

In terms of market capitalisation, households own about 22 per cent of the stock market. The value of household bank deposits, meanwhile, is equivalent to about 80 per cent of gross domestic product.

The vast majority of mainland market cap is ultimately owned by the government and government-linked entities and many market participants say they have been the main drivers of margin trading.

The lack of data able to confirm this is a problem, but Yao comes up with a proxy by tracking the proportion of profits from industrial enterprises that come from non-operating activities. They doubled to about 10 per cent of total profits from mid-2014 to mid-2015 – coinciding neatly with the rally in mainland stocks.

Industrial firms made combined profits of 2.25 trillion yuan in the January to May period, according to official data.

The financial sector’s outsized contribution to economic growth in the first quarter of the year might also suggest some involvement in the run up and run down. Finance firms added about 0.5 percentage points to first-quarter GDP growth in inflation-adjusted terms, according to Societe Generale estimates.

Some market watchers say the clearest tell-tale sign of where the margin buck is likely to stop comes courtesy of Sunday evening’s announcement that the People’s Bank of China will be providing liquidity support to the China Securities Finance Corp (CSFC).

CSFC is the clearing house for margin financing and stock lending businesses in the mainland. It is the sole provider of margin financing loan services to securities houses.

The devil is in the detail of how liquidity is provided by the central bank and whether it is to be open-ended, or involving outright purchases of stock on the market.

Unsurprisingly those details were not immediately available, leaving many analysts chewing on the issue of just how far the margin debt problem might extend into the financial system and how long it will take the People’s Bank of China to get a true handle on bank- and government-linked exposures.

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