China Margin Debt Drops to 2014 Low After Shanghai Stock Rout

Margin debt in China’s stock market shrank to the lowest level since December 2014, a sign of waning investor confidence after the Shanghai Composite Index’s biggest monthly tumble since 2008.

The outstanding balance of margin debt on the Shanghai and Shenzhen stock exchanges dropped for 22 straight days to 897.6 billion yuan ($136.4 billion) on Monday, according to data compiled by Bloomberg. It fell below the lows reached during a summer rout when the Shanghai gauge tumbled more than 40 percent from mid-June through its August low.

Margin trading was blamed for exacerbating the selloff last summer that led the securities regulator to crack down on the business by raising margin requirements and punishing brokerages for allowing unqualified clients to borrow funds. While smaller leverage reduces risks to the financial system, it could potentially also curb investors’ ability to make big bets, making rallies harder to come by.

“The falling margin debt is taking its toll on the market and sentiment as there’s no fresh capital moving in and no one actually buys,” said Wang Zheng, the Shanghai-based chief investment officer at Jingxi Investment Management Co. “Some brokerages are advising investors to close positions rather than add to margin requirements now to reduce business risks.”

The debt balance is down 61 percent from its peak of 2.3 trillion yuan in June. The China Securities Regulatory Commission said last month risks related to margin trading and short selling are “controllable” with average daily margin calls down 40 percent from a year earlier in 2016.

— With assistance by Shidong Zhang

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