Traders jump back into Chinese stocks, boosting leveraged buying balance to US$150bn

Chinese traders are flocking back to the stock market as rising share prices and higher market turnover bolster demand for stocks.

Leveraged investors are increasing their stock buys, pushing the outstanding balance of margin trading to a 20-month high this week, while the number of new stock investors increased at the fastest pace in almost five months last week.

The Shanghai Composite Index’s breaking through the major resistance level of 3,300 points last month has buoyed buying sentiment, with August’s average daily trading turnover hitting the highest level this year on a monthly basis. The benchmark has already advanced 10 per cent from a May low as commodity producers lead the gains on better-than-expected earnings.

“The current scenario indicates the market is in pretty good shape,” said Wang Chen, a partner at Xufunds Investment Management in Shanghai.

The Shanghai Composite rose 0.3 per cent to 3,366 at the close on Wednesday.

The outstanding balance of leveraged buying on the mainland’s two stock exchanges totalled 987.2 billion yuan (US$150.3 billion) as of Tuesday, the highest level since January last year, according to data compiled by Bloomberg. The bourses added 337,400 new stock investors last week, the most since April, data from China Securities Depository and Clearing showed.

Still, the balance of margin trading is down 56 per cent from its peak registered in June 2015 after a market crash punished leveraged traders, and the weekly number of new investors is about a fifth of the all-time high seen in May 2015.

The growth in leveraged buying and stock turnover are benefiting securities firms. A measure of 23 mainland-listed brokerages has gained 16 per cent since its May low, with Guoyuan Securities and Shanxi Securities rising at least 35 per cent, according to data compiled by Bloomberg.

Interest fee earnings from lending money and stocks to stock investors is already becoming an increasingly major contribution to brokerages’ revenues – after broking, investment banking and proprietary trading businesses.

China Galaxy Securities and China Merchants Securities recommend buying brokerage shares, citing improving fundamentals and lower-than-historical-average valuations.

Net incomes for mainland-listed brokerages rose 2.7 per cent from a month earlier in August, according to China Galaxy Securities.