Borrowed cash has fuelled the biggest speculative rally in mainland stock markets in five years, leaving investors exposed to the risk of financial wipeout if bullish sentiment suddenly sours. The number of stocks bought with loaned money, also known as margin trading, has doubled in six months, and totals 881 billion yuan (HK$1.1 trillion) - equivalent to 18 per cent of the Shanghai and Shenzhen bourses' combined 4.8 trillion yuan market capitalisation, according to official data collated by Bloomberg. Unofficial estimates suggest stocks bought on credit may account for as much as 40 per cent of the market. "When you have leverage like this, things are magnified," China economic analyst Anne Stevenson-Yang said. Encouraged by government dictate and a recent interest rate cut, Shanghai's market is up 35 per cent year to date, giving investors an incentive to re-enter markets after years of meagre returns. Some are clearly playing with gusto. A jump of 18 per cent since November 11 saw fresh records set for turnover volumes and volatility spikes in Shanghai as investors leveraged up as much as 500 per cent to cash in on the stock frenzy. But it's a high-risk play as lenders review positions on a daily mark-to-market basis. This means investors can face cash calls or risk seeing a forced sale of their shares should prices drop. Any sudden fall becomes self-perpetuating as brokers liquidate holdings to safeguard their lending ratios, leaving investors holding only their shirts. Tuesday's drop of more than 7.8 per cent from peak to trough in Shanghai was extraordinary, said analysts, as was yesterday's rebound of nearly 3 per cent, given the volumes involved and China's position as the world's second-largest market measured by turnover. "This volatility will probably dissuade some [foreign] investors from getting in", and there are other markets, like India, that look a lot cheaper, said Andrew Collier, Orient Capital Research managing director. The volatility also suggested that official data, based on brokerages' lending books, did not reflect the full picture. The actual percentage of stocks bought on margin was between 20 and 30 per cent said Yang, citing financial market sources. However, Collier said it was closer to 40 per cent, adding that investors were pledging shares to multiple lenders in a repeat of the warehousing scandal in Qingdao in which the same metal holdings at the port were collateralised against numerous loans. Typically, margin traders stump up 30 to 50 per cent equity and then borrow the remainder at an annualised 8 per cent. But, in a departure from previous Chinese bull runs, newfangled products enable investors to gear up further. So-called umbrella trusts, totalling 300 billion yuan, leverage money from institutions and hedge funds to invest directly in stocks and structured derivatives, estimates Yang. Such trusts borrow three to five times their capital, she said. And online platforms now let retail investors aggregate money and match the minimum 500,000 yuan required to open a margin account. The sudden flood of opaque liquidity worries observers. "Things that used to be fully funded in China are more and more funded by credit. This clearly makes the markets more vulnerable to shocks and downward pressure," said market commentator Fraser Howie.