Shanghai Composite Rallies Above 3,000 as Margin Debt Curbs Ease

  • CSF resumes durational loans to brokerages for margin trading
  • Chinese stock turnover jumps to highest level since December

China’s benchmark stock index rallied above the 3,000 level for the first time in two months and turnover surged after policy makers loosened controls on margin lending.

The Shanghai Composite Index climbed 2.2 percent, led by brokerages and technology companies. China Securities Finance Corp., the state-backed agency that provides funding to brokerages for margin trading, said late Friday it will restart offering loans to securities firms for periods ranging from 7 days to 182 days. Citic Securities Co. posted its biggest gain in three months. Hundsun Technologies Inc. surged by the daily limit for a third day. Hong Kong’s exchange operator jumped the most in eight months amid speculation the start date for a stock link with Shenzhen will be announced this week.

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. Boosting the stock market could encourage companies to raise money through equity and help the government in its efforts to reduce the nation’s soaring debt load.

“The state doesn’t want the market to decline and they want to see buying from investors so we’ve seen them loosen their grip on margin lending,” said Wang Zheng, who has been adding his holdings recently as the Shanghai-based chief investment officer at Jingxi Investment Management Co. “There’s no big negative news now as the top priority for the regulator is to stabilize the market. There will be no radical reforms.”

The Shanghai Composite rose for a seventh day to 3,018.80 at the close. Combined trading values on the Shanghai and Shenzhen exchanges jumped to 901 billion yuan ($138.9 billion) on Monday, the highest level since Dec. 23, according to data compiled by Bloomberg.

The Shanghai gauge has rebounded 14 percent from a January low amid signs of state-fund buying during this month’s National People’s Congress. The index posted its steepest weekly gain since November last week amid speculation that some commercial banks had resumed non-brokerage margin lending, which was banned by regulators last summer. Concern about stock oversupply also receded after the government said a new registration-based system for new shares would take time and left out the phrase “setting up strategic emerging industries board” from its latest economic five-year plan.

The CSI 300 Index rose 2.4 percent, while the ChiNext index of small-cap shares surged 2.3 percent for a three-day, 13 percent gain. The Hang Seng China Enterprises Index added 0.5 percent in Hong Kong, taking to 19 percent its rebound since the Feb. 12 low. The Hang Seng Index gained 0.1 percent.

Brokerages Rally

China Securities Finance will also cut interest rates on the debt to as low as 3 percent, according to a statement posted on its website Friday.

Surging margin debt helped the Shanghai Composite more than double at last year’s peak as easy access to leverage gave the country’s millions of individual investors increased buying power. The index tumbled more than 40 percent from its June 12 high as investors cut leveraged bets. The amount of shares purchased on margin has plunged more than 60 percent from the pre-rout peak in 2015.

Brokerages led a gauge of financial companies to a 3.3 percent gain in the CSI 300 Index, the most among 10 industry groups. Citic Securities surged by the 10 percent daily limit to the highest close this year. Everbright Securities Co. and Founder Securities Co. all soared by 10 percent in Shanghai.

Policy Change

Hundsun Technologies also jumped 10 percent. The shares have rallied even as the company said last week its HOMS software system, which facilitates non-brokerage margin lending, won’t be restarted.

China should channel more savings into the capital markets, which will help reduce leverage in the corporate sector and boost equity financing, People’s Bank of China Governor Zhou Xiaochuan said over the weekend. One option for addressing high leverage is to develop “robust capital markets,” Zhou said.

The China Securities Finance announcement is the first significant policy change by the new head of the nation’s securities regulator, according to Michael Shaoul, chief executive officer of Marketfield Asset Management. Liu Shiyu was appointed chairman of the China Securities Regulatory Commission a month ago after his predecessor was criticized for mismanaging market-rescue efforts.

“The securities agency’s move is more of a normalization and unwinding of restrictions that they’ve put in place a year ago,” Shaoul said in New York. “I don’t think they have any wish to go back to the crazy margin-driven rally in 2015, but they’d be comfortable with a gradual increase in margin lending past this point."

Shenzhen Link

In Hong Kong, HKEx jumped 5.6 percent amid speculation the start date for the city’s stock link with Shenzhen will be announced at the Boao Forum in Hainan province.

“Premier Li Keqiang is going to attend the conference, and the Shanghai-Hong Kong stock connect was announced during this conference,” said Kenny Tang, chief executive officer of Jun Yang Securities Co. in Hong Kong. “Because the sentiment has improved, the market is now quite focused on positive news to push up the share prices.”

— With assistance by Shidong Zhang

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