Global markets have tumbled recently and A shares also have taken a nosedive despite the limited participation of foreign investors.
The Shanghai Composite Index has slumped more than 20 percent after hitting a peak of 5,178 points on June 12.
Some margin traders have been forced to liquidate their positions amid the market rout.
Up to 20 percent of their clients have been told to cover losses on their margin accounts, according to sources from a local securities firm.
The margin call has exacerbated the market freefall.
In a bid to stave off panic selling, China’s securities regulator said on Monday that margin trading at brokerages was “controllable” .
Margin calls on Monday morning on the off-market HOMS pooling system were about 2.2 billion yuan (US$354.66 million).
The amount was below 4 billion yuan on June 25 and 26, a fraction of the total transaction value, the China Securities Regulatory Commission said in a statement on its official microblog.
With market turnover of 1.54 trillion yuan on Monday, several billion yuan worth of margin call is not that worrying.
However, confidence has been shattered after investors have been forced to cut exposure.
In fact, there is no major headwind for the mainland market apart from tighter rules on margin trading.
The market is likely to stage a modest uptick as leveraged trading has been substantially reduced.
With the bull market largely intact, 4,000 points will be a support level for the medium and long term.
The Chinese central bank unveiled cuts in interest rates and the reserve requirement ratio for commercial banks over the weekend, part of efforts to shore up the stock market.
However, the market slumped again on Monday, stoking fears authorities may be running out of policy tools.
China is preparing to allow local government-run pension funds to invest in the stock market for the first time, potentially releasing up to 500 billion yuan into the equity market.
These pension funds can invest up to 30 percent of their net assets in Chinese stocks, equity funds and balanced funds, according to a draft from the Ministry of Human Resources and Social Security and Ministry of Finance for public consultation.
The funds have investable assets of more than 2 trillion yuan.
Many investors have struggled to find the bottom in recent days.
In fact, the floor is already in place for the short term.
Investors should feel at ease, knowing state investors will step in if the market tumbles again sooner or later.
They should buy some quality stocks and cheap financial plays during the sell-off.
This article appeared in the Hong Kong Economic Journal on June 30.
Translation by Julie Zhu
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