Bocom Sees Chinese Stocks Rebounding After Margin Debt Shakeout

China needs another month to get rid of unregulated margin debt, leaving stocks poised to rebound from around November, according to Bocom International Holdings Co.

The nation had cleared up 69 percent of non-compliant margin lending accounts as of Sept. 23, China Securities Regulatory Commission spokesman Zhang Xiaojun said at a briefing on Friday. A rapid increase in leverage fueled the Shanghai Composite Index’s doubling from November through mid-June, and deepened the rout on the way down as traders unwound positions amid a government crackdown on shadow financing.

"China needs one more month or so to fully squeeze out non-brokerage margin debt, so it’s highly likely this will be done by the end of October," Jupiter Zheng, a Hong Kong-based analyst at Bocom International, said in an interview. “The stock market will then recover from November as market sentiment improves."

The Shanghai Composite has gained 5.4 percent from its Aug. 26 low. The benchmark measure remains 40 percent below this year’s peak amid concern about a deepening economic slowdown.

The outstanding balance of margin loans on the Shanghai and Shenzhen bourses has tumbled by 59 percent to $147 billion since June, government data show. Official and unofficial margin financing plunged to 2.7 trillion yuan ($424 billion) in August, down from 5.3 trillion yuan two months earlier, according to BNP Paribas SA estimates. The worst is over for Chinese stocks, HSBC Holdings Plc’s Steven Sun said last week, citing the decline in leverage.

Intervention Over

The government, which Goldman Sachs Group Inc. says spent $235 billion on stock-market rescue efforts in the three months through August, may halt intervention once non-brokerage margin debt is cleaned up, BNP Paribas said. That could drag on mainland-listed banks, which have been beneficiaries of state buying, the French bank wrote in a report last week, saying Hong Kong-listed counterparts are preferable.

China’s rescue fund will stay in the market until it sees signs of a sustained recovery, said Bocom’s Zheng.

“It creates a favourable environment for the ‘national team’ to exit the market if non-brokerage margin debt is pretty much cleaned up," Zheng said. “But it’s not a sufficient condition for an exit."

— With assistance by Amanda Wang, and Kyoungwha Kim

Before it's here, it's on the Bloomberg Terminal.