Get ready for tighter China margin-trading rules

June 5, 2015 11:43 AM (UTC+8)

 

China’s securities regulator said it is amending margin-trading and short-selling rules. It’s just not telling us when.

Zhang Xiaojun, a spokesman for the China Securities Regulatory Commission, made the comments at a weekly news conference. He did not elaborate, reported Reuters. Zhang also said that the regulator was considering new rules for crowd funding.

Short selling is when investors borrow stocks from brokerages. They sell them betting that prices will fall and can be bought at a cheaper price in the future.

Margin trading is when investors buy stocks with a small down payment, then borrow the balance of the purchase price from their brokerage. The number of loans has more than doubled this year, reported the Wall Street Journal and margin-trading volume has hit record highs. The amount of outstanding margin loans for stock trading in China stood at 2.17 trillion yuan ($350 billion) on Thursday, according to data provider Wind Info.

The increased use of borrowed money by retail investors, who dominate China’s stock trading, has fueled the market’s rally to a seven-year high. The benchmark Shanghai Composite Index, which is up 55% this year, gained 1.5% Friday to finish at 5023.10, its highest close since January 2008.

Leverage, such as margin trading, is fine when stocks are going up, but it can be a bitch when it goes against you. If the market falls, margins will be called, which means investors need to pay off the loans. This could force them to sell their stocks at ruinous losses, threatening social stability.

On Thursday, brokerage Golden Sun Securities suspended margin financing for purchases of shares listed on Shenzhen’s growth board ChiNext, sparking panic selling. The market later recovered.

Then on Friday, CITIC Securities, a major Chinese brokerage, tightened its margin trading rules for the second time in less than a month. Many suspect the government ordered the firm to make the change.

“As outstanding margin loans hits new highs, the regulator may hope to slow down the inflow of leveraged money to the market,” Hao Hong, managing director of research at Bocom International, told the Wall Street Journal.

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