Shanghai Margin Debt Shrinks Most in 19 Months After Rout

Traders reduced holdings of Shanghai shares purchased with borrowed money by the most since June 2013 after regulatory efforts to curb margin lending sparked the biggest stock-market selloff in six years.

The outstanding balance of margin debt fell 1.9 percent to 752 billion yuan ($121 billion) yesterday, according to data from the Shanghai Stock Exchange. The city’s benchmark equity index sank 7.7 percent yesterday, the most since June 2008.

Chinese stocks tumbled after regulators suspended the nation’s two-biggest brokerages from loaning money to new equity-trading clients and said securities firms shouldn’t lend to investors with assets below 500,000 yuan. While the China Securities Regulatory Commission said it isn’t trying to curb equity trading, yesterday’s tumble fueled concern that some speculators will be forced to sell holdings to repay debt.

“De-leveraging kicked off margin calls,” Zhou Hao, a Shanghai-based economist at Australia & New Zealand Banking Group Ltd., said yesterday. “Investors need money to settle margin loans which is bringing more losses to the market. The market’s direction is unpredictable and the volatility will rise.”

Market Selloff

In a margin trade, investors use their own money for just a portion of their stock purchase, borrowing the rest from a brokerage. The loans are backed by the investors’ equity holdings, meaning that they may be forced to sell when prices fall to repay their debt.

Investors’ interpretation that regulators are suppressing the stock market through the suspension isn’t accurate, CSRC spokesman Deng Ge said, according to a statement on the commission’s website. The regulator took action “to protect investors’ rights and support the healthy growth of margin trading,” Deng said.

The Shanghai Composite rebounded 1.8 percent today. The gauge had jumped 67 percent in the 12 months through last week on record volumes as individual investors piled into the market.

“The comments by the regulator yesterday night seem to have, to some degree, calm investors,” said Gerry Alfonso, a China equity sales and trading director at Shenyin & Wanguo Securities Co.

Citic Securities Co., Haitong Securities Co. and Guotai Junan Securities Co. were suspended from lending money and stocks to new clients for three months, the CSRC said on its microblog on Jan. 16.

The regulator punished nine other brokerages for offenses including allowing unqualified investors to open margin finance and securities lending accounts, it said. On the same day, the China Banking Regulatory Commission banned banks from lending to companies that borrow to invest in equities, bonds, futures and derivatives.

Outstanding margin loans on both the Shanghai and Shenzhen exchanges surged more than tenfold in the past two years to a record 1.1 trillion yuan as of Jan. 16, or about 3.5 percent of the nation’s market capitalization. Both bourses expanded the number of stocks available for margin trading to 900 from 695 in September.

— With assistance by Billy Chan, and Shidong Zhang

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