A surge in margin trading could spell heavy losses for Chinese retail investors inexperienced with handling the risks involved.
Volatility returned with a vengeance to the benchmark Shanghai Composite Index this week. It rebounded 2.9 percent Wednesday after a 5.4 percent collapse Tuesday, the biggest single-day decline in more than five years.
Many traders were caught off guard and fear that the increase in leverage has made the market unstable, the Wall Street Journal reported Thursday.
Margin trading, in which investors borrow money from brokerages to purchase stocks, accounted for 14.7 percent of trading volume Tuesday, down from an all-time high of 18.2 percent on Nov. 24 but still almost double the 8.6 percent at the beginning of the year, figures from data provider WIND Info show.
The money investors have borrowed for margin trading reached a record 919.97 billion yuan (US$148.69 billion) on Tuesday, WIND Info said.
Trading with borrowed money magnifies potential gains if shares rise but deepens losses if they fall.
At a routine weekly briefing on Friday last week, a spokesman for the China Securities Regulatory Commission noted the sharp rise in margin lending and asked retail investors to “invest rationally” and not be “led astray by thoughts like selling apartments or borrowing money to buy stocks”, the newspaper said.
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