HSBC Thinks China Stocks Rout Is Nearly Over

Stephen Roach: China Is Not Crash Landing
  • Margin loans are at 10-month low relative to market value
  • Record selloff by leveraged traders fueled stock declines

Further losses by Chinese stocks are limited after leveraged traders cut $218 billion of positions, according to HSBC Holdings Plc.

The outstanding balance of margin loans on the Shanghai and Shenzhen bourses has tumbled by 60 percent to $147 billion since the June peak. Borrowed funds now account for 2.8 percent of overall market capitalization, a 10-month low and down from a record 4.5 percent earlier this year, according to data compiled by Bloomberg. The figures don’t include unofficial debt.

“We’ve seen the worst" for mainland stocks, said Steven Sun, Hong Kong-based head of China equity strategy at HSBC, who has a neutral position on yuan denominated shares. “The whole deleveraging process is largely over."

As China’s stock boom turned to bust in June, traders started to cut a record pile of debt on speculation valuations were unjustified. Margin calls and a government crackdown on unregulated loans forced further selling. President Xi Jinping’s comments on Tuesday that equities have entered a phase of "self recovery" signal that policy makers consider the market strong enough to withstand a reduction of unprecedented state support.

The balance of margin debt has been stable since declining to its lowest level since December last week, while the Shanghai Composite Index is little changed for the month after falling about 40 percent from this year’s peak. A five-fold surge in leveraged wagers helped propel the gauge to a more than 150 percent gain in the 12 months through June 12.

The benchmark index climbed 0.9 percent at the close on Thursday.

The securities regulator has been taking action against unregulated borrowing that Bocom International Holdings Co. estimated stood at about $322 billion around the beginning of July. The China Securities Regulatory Commission has also restricted margin positions on the futures market and curbed short selling.

So-called A shares on the mainland will remain stuck in a range as valuations are high relative to shares in Hong Kong cap gains, said HSBC’s Sun. Dual-listed stocks are twice as expensive on average in Shanghai than Hong Kong, according to Bloomberg calculations.

“About 60 percent of official leverage and 80 to 90 percent of less regulated
financing has been unwound," Sun said. "For a recovery in A shares, it will take some time."

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