China’s planned ceiling on brokerages’ lending to customers for share purchases is set so high that it may prove only a limited constraint on the funding driving the nation’s stock boom.
Brokers may have 4.5 trillion yuan ($725 billion) of financing capacity by year-end under proposed rules announced Friday, China International Capital Corp. analysts say. That would be more than double the current 2.2 trillion yuan of funding outstanding.
China’s securities regulator plans to impose a financing ceiling of four times firms’ net capital after the Shanghai Composite Index surged more than 140 percent in a year. Brokerages are boosting their finances and lending capacity by selling stock, with Guotai Junan Securities Co. set to this week price a share sale that may be China’s biggest since 2010.
The planned rules won’t “constrain the expansion of the margin trading and short-selling businesses in the near term,” CICC analysts Du Lijuan and Mao Junhua said in a note on Monday.
Guangzhou-based GF Securities Co., the nation’s biggest margin lender as of the first quarter, would face a 234 billion yuan ceiling, based on its 58.5 billion yuan of net capital as of April 10. That’s more than double its 103 billion yuan of lending as of March 31.
GF has a self-imposed cap of 190 billion yuan, the company said by e-mail on Monday.
“GF Securities has the capital strength to push its margin-finance balance to the maximum allowed under the proposed cap,” said Chen Xingyu, a Shanghai-based analyst at Phillip Securities Research. At the same time, he said the risk of a market bubble is encouraging brokerages to exercise more caution, including tightening margin-finance requirements.
The Shanghai Composite fell 2 percent as a flood of share sales threatens to lure funds away from existing equities and after speculation proved unfounded that the central bank would cut lenders’ reserve ratios.
Rules announced by the China Securities Regulatory Commission on Friday would also let brokers roll over clients’ margin finance contracts beyond six months.
Brokers have been lining up to sell shares during the market boom. Shenwan Hongyuan Group Co. plans to raise up to $2.9 billion in a private placement, the company said June 12.
Stock forecasters in search of an early-warning system for the next Chinese bear market are zeroing in on the country’s record pile of margin debt.
When that three-year build-up of leveraged positions starts to unwind, regulators will struggle to limit the selloff, according to Bocom International Holdings Co. and Rabobank International. Almost all of this year’s biggest declines in the Shanghai Composite, including a 6.5 percent slump on May 28, were sparked by investor concerns over margin-trading restrictions.
— With assistance by Aipeng Soo