China’s margin debt has plunged by 1 trillion yuan ($156 billion) from its June peak as stock traders close out bets using borrowed money amid a $5 trillion rout.
Outstanding margin loans on the Shanghai and Shenzhen exchanges fell to about 1.25 trillion yuan on Monday from a record high of 2.27 trillion yuan on June 18. The Shanghai Composite Index has plunged 45 percent from its June peak amid concern that the highest valuations among major world markets are unjustified given the outlook for slowing economic growth.
While KGI Securities Co. and Shenwan Hongyuan Group Co. say the slump in margin lending will help reduce volatility from the highest level in almost two decades, CIMB Securities Ltd.’s Scott Hong sees little chance of a sustained rally without a rebound in leverage.
“The bull run was driven by leveraged funds, and the bull will cease to exist when leverage fades,” Hong, an analyst at CIMB Securities in Hong Kong, wrote in an e-mail. “Range-bound consolidation would be the best-case scenario.”
A surge in leverage earlier this year helped fuel the longest-ever bull market in Chinese stocks, which ended in June. The Shanghai Composite fell for a fifth day on Wednesday as traders weighed the impact of an overnight interest-rate cut.
The nation’s equities have lost $5 trillion, or half their value, since mid-June. The government has halted direct intervention in stocks this week as policy makers debate the merits of an unprecedented market rescue, according to people familiar with the situation.
“It’s a healthy drop, I believe,” said Ken Chen, a Shanghai-based analyst at KGI Securities. “The exit of margin traders shows speculative trading is getting less at the moment, which will likely dampen market performance in the short run, but is essential and beneficial in the long term.”
The value of shares traded on the index has fallen almost 60 percent from this year’s high in June as the government allowed hundreds of companies to halt trading, restricted short sales and suspended initial public offerings. The number of new investors is at a fifth of the peak in May, when the government started releasing figures.
Stock-market leverage has stayed relatively steady through unofficial channels, according to Credit Suisse Group AG. The firm estimated the amount of funding via products such as trusts at as much as 1.5 trillion yuan this month, versus 1.6 trillion yuan in May.
China’s securities regulator is investigating a unit of Hundsun Technologies Inc. for suspected violations of securities laws. The probe may be related to Hundsun’s financial investment platform known as HOMS, which allows trust firms and online lenders to provide leveraged trading facilities to clients, according to analysts at China International Capital Corp.
“The current margin debt levels are much more sustainable, with the market needing to find a level in which it can operate smoothly without the massive volatility experienced in recent times,” said Gerry Alfonso, a sales trader at Shenwan Hongyuan in Shanghai.
— With assistance by Shidong Zhang, Amanda Wang, and Cindy Wang