China Margin Debt Shrinks First Time in a Month Amid Stock Rout

Chinese stock investors reduced leveraged positions in Shanghai for the first time in a month as the benchmark equity index plunged.

The outstanding amount of margin debt on the Shanghai Stock Exchange fell to 1.479 trillion yuan ($238 billion) on Friday from a record 1.483 trillion yuan the previous day, the first decline since May 22. Shares sank 6.4 percent Friday to cap their worst week since the global financial crisis in 2008.

A pullback by margin traders would undercut one of the biggest drivers of the rally that’s lifted the Shanghai Composite Index up 121 percent in the past 12 months. Most of this year’s biggest declines in the gauge, including a 6.5 percent slump on May 28, were sparked by investor concerns over margin-trading restrictions. The regulator announced plans June 12 to limit the amount brokerages can lend for stock trading.

“The drop in margin debt is a reflection of the tightening margin financing measures undertaken by Chinese brokers and the authorities,” said Bernard Aw, a strategist at IG Asia Pte Ltd. in Singapore. “It is possible that some of the unwinding of margin debt contributed to the selloff. Much also is possibly due to the herd mentality of retail investors.”

GF Securities Co., Haitong Securities Co. and Changjiang Securities Co. have all raised margin requirements to try to limit their exposure to a bust in a market where retail investors account for 80 percent of trading. The Shanghai Composite plunged more than 13 percent last week as strategists at BlackRock Inc., Credit Suisse Group AG and Bank of America Corp. issued bubble warnings about Chinese equities and initial public offerings lured funds from existing equities.

Even after the tumble, the median stock on mainland bourses is valued at 92 times earnings, versus 68 at the height of the nation’s equity mania in 2007. Markets in China were closed for a holiday Monday, while the Hang Seng China Enterprises Index gained 0.8 percent at 9:56 a.m. in Hong Kong.

About $1.3 trillion was wiped off mainland Chinese equities last week, more than the value of Australia’s entire stock market.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE