China Securities Regulatory Commission warns investors about illegally financed margin trading amid run-up in markets
- Warning comes as frenzied trading pushes Shanghai Composite up by 14 per cent in six sessions
- Rampant unregulated margin financing seen as responsible for 2015 crash
The China Securities Regulatory Commission (CSRC), China’s top watchdog, on Wednesday warned investors about financial institutions that are illegally financing margin trading, a major culprit behind the 2015 stock market crash.
The CSRC published a list of 258 organisations that it said were providing private loans to stock traders who were looking to magnify their gains through leveraged investments.
The commission called on investors to avoid using such margin financing by institutions that were not qualified brokerages. It has banned the practice since the rout in 2015, which wiped off US$5 trillion in market capitalisation. “We ask investors to raise their risk prevention awareness and actively avoid margin financing in order to prevent losses,” it said in a statement.
The warning came amid a rapid run-up that has sent the Shanghai Composite Index soaring 14 per cent over the past six trading sessions. The trading volume has also boomed, reaching a five-year high of 1.74 trillion yuan (US$248 billion) on Tuesday.
The lightening speed of the rally has sparked concern about a potential quick pump-and-dump, which would severely hurt retail investors who are piling in on stocks, in scenes reminiscent of the frenetic mood in the build-up to the 2015 market crash. Rampant growth in leveraged stock buying financed by unregulated platforms is viewed by the regulator as having accelerated the dramatic sell-off in June 2015.
Lenders would provide loans of up to 20 times the deposit of an investor, and profit from the interest on the loan, or gains made by the trader. When the value of shares started to dip, however, investors were forced to sell in order to repay their loans.