Chinese Small-Cap Stocks Enter Bull Market as Margin Debt Jumps

Updated on
  • Leverage rebounds after government restarts loans to brokerage
  • Shanghai Composite ends above 3,000 after swinging most of day

Chinese stocks rose in late trade, with a gauge of small companies entering a bull market, as a revival in margin lending underpinned demand for riskier shares.

The small-cap ChiNext index advanced 20 percent from a February low, the threshold for a bull market. Margin financing on the nation’s two stock exchanges climbed the most since November on Monday after policy makers loosened controls. The Shanghai Composite Index added 0.4 percent to close above the 3,000 level for the second time this week, with gains coming in the last 30 minutes of trading as technology companies rallied.

Moves in the Shanghai Composite over much of the past two years have closely tracked appetite for leveraged bets, which fell to the lowest level since December 2014 last week. Relaxing restrictions imposed on margin trading during last year’s stock rout may boost China’s stocks, which are the worst-performing equities among global indexes this year.

“The environment for stocks seems to be getting better, with domestic economic data stabilizing and U.S. refraining from raising interest rates, while the rise in margin trading is also fueling buying,” said Dai Ming, a fund manager at Hengsheng Asset Management Co. in Shanghai. “There is still room for the rally to continue, particularly the ChiNext and small-cap stocks, and their valuations may rise to a pretty high levels in this speculative environment,” said Dai, who has recently been adding to his stock holdings.

The Shanghai Composite closed at 3,009.96, with trading volumes in line with the 30-day average. The ChiNext gained 1.7 percent and is valued at 63 times reported profits, compared with a multiple of 16 for the large-cap gauge, according to data compiled by Bloomberg.

The CSI 300 Index added 0.3 percent, with a gauge of technology shares jumping 1 percent for the steepest gain among 10 industry groups. Hong Kong’s Hang Seng China Enterprises Index and the Hang Seng Index both slipped 0.3 percent.

East Money Information Co., the third-biggest weighted stock in ChiNext, jumped 6.3 percent, bringing its rally since Feb. 29 to 40 percent. Hithink RoyalFlush Information Network Co. jumped by the 10 percent daily limit.

Outstanding margin trading rose 2.2 percent, the most since Nov. 9, to 863.3 billion yuan ($133 billion) on Monday, data compiled by Bloomberg show. This came after China Securities Finance Corp. said Friday it will resume offering short-dated margin loans to brokerages. The CSF move, which included cutting interest rates for loans to brokerages, shouldn’t be seen as regulators encouraging leverage in the stock market, the China Securities Journal reported on its front page, without citing anyone.

Credit Suisse Group AG prefers Chinese cyclical and property stocks over small-cap shares because of policy support, global monetary easing and the booming housing market, analysts led by Chen Li wrote in a report. Chen sees risks in small-cap and ChiNext companies due to the expiry of a lock-up period for shares held by pre-IPO investors as well as expensive valuations, the report said.

Airlines declined in Shanghai, with Air China Ltd. and China Southern Airlines Co. retreating at least 1 percent. Belgian police launched a manhunt hours after the blasts at the airport and a subway station, the deadliest attacks ever on Belgian soil. Europe’s leaders pledged a united front against Islamic State after the bomb attacks killed at least 31 people in Brussels.

— With assistance by Shidong Zhang

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