18 February 2019
Although margin financing has been climbing in the A-share market, it remains well below the danger level. Photo:
Although margin financing has been climbing in the A-share market, it remains well below the danger level. Photo:

A-share market: Margin financing not the real threat

Both the Hong Kong and mainland markets have risen steadily in recent months. Still, many investors are very alert to potential risks.

For instance, China’s margin trading and short-selling level reached 991.97 billion yuan as of September 20, hitting a 20-month high.

It’s the first time the gauge has come close to 1 trillion yuan after the stock market collapse two years ago.

Some became worried that the rising leverage may again haunt the A-share market.

In fact, short-selling-investors who borrow stocks from brokerages and sell them made up less than 3 percent of the outstanding margin trading and short-selling. So this indicator largely reflects to what extent investors are using borrowed money to invest in stocks.

Let’s take a look at what happened two years ago.

In Dec. 2014, the outstanding amount of margin trading and short-selling was about 800 billion yuan. In January the next year, the figure crossed the 1 trillion yuan mark and then quickly soared to a record high of 2.27 trillion yuan in June that year.

When the market bubble burst, the sell-off was worsened by margin calls.

The Shanghai Composite Index slumped more than 45 percent to 2,850 points from the peak of 5,178 points in less than three months.

Margin financing finally dropped to 900 billion yuan in early September 2015.

But this time is different because the margin lending rules are much tighter now and the benchmark index is still low.

Chinese authorities have substantially tightened their grip on margin lending since the meltdown.

For example, the minimal asset threshold for individual investors to participate in margin financing has been raised from 200,000 yuan to 500,000 yuan.

Also, the amount brokerages can lend in margin loans should not exceed four times their net capital. And stocks with P/E multiple of over 300 are excluded from margin loans.

The amount of collateral required for margin loans would double from 50 percent to 100 percent of the amount borrowed. That has cut the leverage ratio from 200 percent to 100 percent.

The outstanding amount of margin trading and short-selling indeed climbed over past three months to the current level of close to 1 trillion yuan, but that is still way below the 2015 peak. And it represents less than 2 percent of the current A-share market capitalization, still a reasonable level.

Given that the Shanghai market closed at 3,366 points on Wednesday, 35 percent below the previous peak, and the outstanding margin financing is still 44 percent below the peak level, we are still far away from the danger level.

There is another big difference.

The real trigger of the market crash two years ago was actually the off-market margin loans, which are provided by brokerages, banks and trust companies.

This is how such financing works. For instance, a client can set up a fund with 1 million yuan, and brokerage firm would agree to lend the investor 5 million yuan in addition to boost the fund to 6 million yuan.

Although interest expenses can be quite high, many aggressive investors were using such products in a bid to make a quick buck.

Such off-market margin financing once hit 3.3 trillion yuan in June 2015, even more than the 2.7 trillion yuan of margin lending and short-selling. More importantly, such product was largely unregulated back then.

Sensing the danger, the China Securities Regulatory Commission halted these off-market margin lending in June 2015.

While the intention was good, the abrupt suspension created a domino effect, triggering the meltdown of the stock market.

Now, such lending is already ousted, meaning the leverage concern is far less.

Instead of leverage risk, perhaps investors should pay more heed to major events like the 19th Party Congress on Oct. 18., which may bring important policy changes, as well as geopolitical tensions in countries like North Korea.

This article appeared in the Hong Kong Economic Journal on Sept. 21

Translation by Julie Zhu

[Chinese version 中文版]

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Hong Kong Economic Journal columnist

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