Date
14 December 2017
Small investors in mainland China have been taking on large quantities of margin debt to chase the bull market in equities. Photo: Bloomberg
Small investors in mainland China have been taking on large quantities of margin debt to chase the bull market in equities. Photo: Bloomberg

China shares dive amid crackdown on margin loans

China’s soaring stock market dived 7.7% Monday, the worst collapse in six years, the Wall Street Journal reported.

The selling panic came after regulators disciplined three major brokers for violating rules on margin lending that helped fuel the historic stock rally, in which share prices surged 53 percent last year.

The amount investors in China have borrowed to trade in stocks is among the highest in the world. It rose 9 percent from the beginning of the year to 1.1 trillion yuan (US$177 billion) on Friday, figures from Bank of America Merrill Lynch show.

The small investors that dominate the mainland’s stock markets have only recently begun to take on large quantities of margin loans and face the risk of huge losses if stock prices fall significantly.

“The government wants to keep the leverage risk of margin financing under control,” the report quoted Caroline Maurer, a fund manager at Henderson Global Investors, as saying. 

After the market has risen so much over the last three months, “there has been tremendous short-term profit-taking pressure”, she said.

The securities regulator said Friday that spot checks at three brokerages — Citic Securities, Haitong Securities and Guotai Junan Securities Co. — found they had rolled over margin trading contracts for a large number of clients in violation of rules that require investors to settle at the end of the loan period, usually six months.

The three firms were suspended for three months from opening new margin trading accounts.

In a stock exchange filing, Citic Securities said it has adopted corrective measures. It said it won’t extend any more margin loans beyond their contractual limit. It also raised the minimum assets for a client to open a margin trading account to 500,000 yuan from 300,000 yuan.

Meanwhile, the banking regulator issued draft rules to control entrusted loans, a fast growing part of China’s shadow banking industry in which one company lends to another using a bank as an intermediary.

The regulator said Friday these loans must not be used to invest in securities such as bonds and equities.

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CG/FL

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