Shanghai Margin Debt Falls for Record Streak as Stocks Slump

Updated on
  • Slumping leverage shows decreased risk appetite, JK Life says
  • Shanghai's margin debt balance plunges 61% from June peak

Traders cut leveraged positions in Chinese stocks purchased with borrowed money for a 15th straight day in Shanghai on Thursday, the longest losing streak on record and a signal to some analysts that the bear market may not be over.

After jumping almost seven fold in the two years through June, margin debt slumped as the government started blaming the use of leverage for exacerbating a 40 percent plunge in the stock market last year and traders rushed to sell shares to avoid forced liquidation of their positions. The market rout led the securities regulator to crack down on the business by raising margin requirements and punishing the biggest brokerages for allowing unqualified clients to borrow funds.

“It’s a result of the decreasing risk appetite,” said Wu Kan, a fund manager at JK Life Insurance Co. in Shanghai. The Shanghai Composite Index may fall to 2,700 in the first quarter, he said.

China’s benchmark index rose 1.3 percent to 2,916.56 at the close on Friday, paring losses to 18 percent this year, the worst performer among the world’s major stock measures tracked by Bloomberg. The Shanghai Composite entered a bear market last Friday as investors sold stocks amid concern the economic slowdown is deepening and yuan volatility may trigger more capital outflows.

Fundamentals Return

The outstanding balance of margin debt on the Shanghai Stock Exchange dropped to 578 billion yuan ($88 billion) on Thursday, according to data compiled by Bloomberg. That’s down 61 percent from the peak of 1.5 trillion yuan in June and 2 percent shy of the low in September, when the stock market was in the throes of a selloff that erased about $5 trillion. The losing streak is the longest since the bourse began releasing the data in April 2010.

Even after the decline, the median Chinese company on mainland exchanges is valued at 41 times reported earnings, the highest level among the world’s largest markets.

“With less margin financing now, people will be more focused on fundamentals, which hasn’t been the case in the past,” said Nicholas Yeo, an investment manager at Aberdeen Asset Management in Hong Kong. “That’s healthier for the market.”

— With assistance by Shidong Zhang

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