China Margin Finance Boom Fuels Record Brokerage Bond Sales

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Soaring demand for margin financing in Hong Kong to take advantage of booming Chinese stocks has spurred record offshore fundraising by the nation’s brokerages.

Overseas bond issuance from Chinese non-bank financial institutions has jumped four times to $11.5 billion this year compared with the same period in 2014, according to Bloomberg-compiled data.

The surge comes after China moved in March to let more mainland funds buy Hong Kong stocks through the city’s exchange link with Shanghai. China’s world-beating stock rally has fueled an unprecedented $358 billion of margin debt as individual investors seek to amplify equity profits with borrowed funds. Chinese investors are crossing the border to obtain financing in Hong Kong, where costs are lower.

“Chinese brokerages are growing their Hong Kong business, especially margin financing, quite intensely,” said Wei Hou, senior equity analyst for Chinese banks at Sanford C. Bernstein & Co. “That’s because a rising number of Hong Kong and mainland clients are trading stocks in both markets after the regulatory change.”

Haitong Securities Co. has led brokerage offerings with two dollar bonds totaling $1.37 billion. It concludes investor meetings Monday on a planned euro note offering that would be the first by a Chinese brokerage.

Revenue Engine

Haitong International Securities Group Ltd., the brokerage’s Hong Kong-based unit, has more than doubled its margin financing balance to about HK$20 billion ($2.58 billion) as of May 31 from the end of last year, said spokeswoman Mimzy Si. Proceeds of recent fundraisings are largely used to fund margin lending, she said.

Leverage financing is a main driver for brokerage revenues, according to Chen Shujin, banking analyst at DBS Vickers Hong Kong Ltd.

“Most of them are trying to borrow to fund that business,” Chen said.“The more they can borrow the better.”

Brokerages depend on the gap between their financing and lending costs to determine profitability in their margin financing. Haitong International’s $700 million five-year bonds sold in January pay a 4.2 percent coupon. That compares to the 5 percent minimum interest the brokerage charges clients in Hong Kong, Si said.

Lending Rates

On the mainland, annualized rates brokerages charge are higher at 7 to 9 percent, said Hou of Sanford C. Bernstein.

Chinese regulators announced plans Friday to limit the amount brokerages can lend for stock trading amid rising concern the practice could worsen any equity declines. Brokerages such as Changjiang Securities Co. and GF Securities Co. have tightened rules to limit risks.

“Mainland investors, who comprise most of our new clients this year, open accounts in Hong Kong to get cheaper rates for margin financing and also for the access to both the Hong Kong and mainland stock markets,” Haitong’s Si said.

Chinese brokerages have also tapped the Hong Kong equity market for funding, including a rights issue by Haitong International in April.

“The brokerages’ capacity for margin lending also depends on their capital,” said He Xuanlai, credit analyst at Commerzbank AG in Singapore. “They also need to issue debt to boost their lending capacity.”

(Sanford C. Bernstein & Co. was misspelled in the fourth paragraph of an earlier version of this story.)

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