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China's $370 Billion Margin Call

EconMatters's picture




 

By EconMatters

 

China’s stock markets tumbled on Friday to near bear territory further deepening the sell-off that started two weeks ago.  The Shanghai Composite, down 7.4% on the day, has fallen 19% from its June 12 high wiping out $1.25 trillion in market cap. The smaller Shenzhen and ChiNet indices also has plunged 20% from its recent peak.

 

 

Margin Lending Blessed by Beijing

 

Even with recent declines, the Shanghai Composite Index has surged nearly 30% year-to-date. Authorities have allowed local investors to borrow tons of money from brokers to speculate in the stock market  (i.e., Margin Lending), while the central bank PBOC has cut interest rates three times since November.  Beijing also introduced new easing measures in the past couple of days: a proposal to remove a cap on banks’ loan-to-deposit ratio and injecting cash into the financial system.

 

 


Margin Debt Soared to $370 Billion

 

Investors have poured into the market, opening 33 million new brokerage accounts between the start of January and the end of May.  According to Macquarie Research, Chinese margin debt has risen 123% year-to-date, reaching a new record of 2.3 trillion yuan ($370 billion) on June 18.

 

Margin debt in China has reached 8.5% of the value of China’s tradable shares (For comparison purpose, that ratio was only at 4.6% during the peak of the Taiwan Stock Market Bubble back in the late 80's).

 

 

 

 

Margin Debt Could Get Even Worse


It gets even better from there.  Macquarie believed that the brokers should have enough capital available to push margin lending higher from here as reported by Bloomberg:

"We think that the peak should be somewhere around RMB 3 trillion and at the current run rate (ie +16% month-on-month) the market would reach that level around September."


Analysts Cutting Price Target

 

Investors have started to pull out of the market on concerns the government could be looking to rein in this debt-fueled rally.  Meanwhile, more and more analysts are also sounding louder alarms about the over-heated China market.  For example, citing concerns like valuations and high margin debt, Morgan Stanley just lowered its price target for the Shanghai benchmark in a report Thursday.




Plunge Leaves State Media Speechless

 

The usually quick-tongued state media like Xinhua are staying unusually quiet not giving out clues about the government's view on the current market sell-off.

 

Reuters quoted Zhang Xiaojun, a spokesman for the China Securities Regulatory Commission on Friday:

"It's a self-adjustment of the market after earlier excessive gains... Recently, there has been more volatility in the stock market. That requires all sides to treat it rationally." 

Chinese authorities are already trying to discourage speculative bets on the highest-flying stocks. So these rare public comments from the Regulatory Commission seem to suggest authorities are 'comfortable' with the declines.

 

$370 Billion in Margin Trades

 

A stock market collapse would be devastating to China with slowing economy and during a difficult transition from a manufacturing-based economy to private-business-and-consumer-supported.

 

People are already freaking out that Greece is just days away from defaulting on a $1.72 billion loan payment.  Just wait till the margin call on the $370 billion margin debt in China's stock markets should Beijing decide to take a page from Saudi Arabia's oil book.   

 

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Sun, 06/28/2015 - 02:25 | 6243526 HYMN
HYMN's picture

I believe the comment from DeadFred is Deadon the money.

Sat, 06/27/2015 - 22:23 | 6243204 YHC-FTSE
YHC-FTSE's picture

It'll be interesting to find out how much of those investors' balances are in negative credit territory calculated by Free Credit Cash Accounts and Credit Balances in Margin Accounts minus Margin Debt.

As for the US market, NYSE margin debt hit new record highs just a few weeks ago and the latest margin debt is in the half a trillion dollar territory, with around 225 billion in negative credit. So, yeah let's laugh it up and point the finger at the morons in China while ignoring this tiny little tidbit of information.

I'm sure I'm not the only one feeling the ominous tensions of something BIG about to happen. Market collapse, financial system collapse, war to divert attention, false flag to initiate another decade of moronic 9/11 fever, etc. Whatever it may be, it's close.

Sun, 06/28/2015 - 10:43 | 6244158 TheReplacement
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Nibiru

Sun, 06/28/2015 - 14:48 | 6245538 YHC-FTSE
YHC-FTSE's picture

Dude. Seriously? No idea what that was so I had to look it up and it's complete gibberish. Aliens talking, sumerian texts and a hidden planet colliding with earth that didn't happen in 2003 or 2012. How can anyone possibly believe such stuff?

Sun, 06/28/2015 - 13:07 | 6244959 Rock On Roger
Rock On Roger's picture

Heaven is coming.

Sun, 06/28/2015 - 01:00 | 6243466 Soul Glow
Soul Glow's picture

Minus margin debt?  It's a fucking multiple!  These people are fucked!

Sat, 06/27/2015 - 20:43 | 6242964 foxmuldar
foxmuldar's picture

China just opened the biggest shopping mall. How long till it goes belly up. Check it out. Its fucking huge. http://foxmuldar-conservative-thinker.blogspot.com/2015/06/biggest-build...

Sat, 06/27/2015 - 19:22 | 6242741 Thomas Aquinas
Thomas Aquinas's picture

The Chinese bubble is just another big steal by the big boys, who have a big opportunity to hoover up more billions from gullible investors. But the icing on the cake for them will be the deliberate global crash to come!

Sat, 06/27/2015 - 22:28 | 6243218 DeadFred
DeadFred's picture

I keep trying to figure this out. They encouraged this bubble. They blessed the margine accounts. They could have stepped in to stop it at any point but didn't. They're not stupid, this isn't about a few corrupt people making a few million/billion. What's their game? My best guess is it's part of a plan to crash the West. China figures it will make its way out of the rubble faster than the West and will be top dog in the new order.

Sun, 06/28/2015 - 13:35 | 6245160 Crocodile
Crocodile's picture

That would assume the elite or globalist ruling over China are any different than the west.  That is a very large assumption to make, for the rulers of this world look upon "everyday" people as "serfs".  They are uncaring, unmerciful, unloving. liars murderers and deceivers; much like most people from heavens perspective...the one perspective that always and forever counts.

--------------------------------

Would it surprise anyone to find out in the future that the East vs West was no more than Democrat vs Republican?   Divide and conquer in order to control; the devil's strategy from the beginning and he was a liar and murderer from the beginning of man's history.

--------------------------------

Anyone remember this; it is worth watching again and the second link is the full interview.  Aaron Russo (Reflections and Warnings -10min.) https://www.youtube.com/watch?v=QyzW8tV-bz4

------------------------

What Aaron Russo warns was given as a warning almost 2000 years ago and it is now in our face.  God warns because God loves, but that love is limited in degree, but not in breadth.

Sun, 06/28/2015 - 18:19 | 6246545 Crocodile
Crocodile's picture

China already owns the Port of Los Angeles and many other ports on the east, west and gulf coasts. 

Sat, 06/27/2015 - 22:28 | 6243217 DeadFred
DeadFred's picture

I keep trying to figure this out. They encouraged this bubble. They blessed the margine accounts. They could have stepped in to stop it at any point but didn't. They're not stupid, this isn't about a few corrupt people making a few million/billion. What's their game? My best guess is it's part of a plan to crash the West. China figures it will make its way out of the rubble faster than the West and will be top dog in the new order.

Sun, 06/28/2015 - 01:07 | 6243473 Soul Glow
Soul Glow's picture

Look, everything is going to crash in a fiat denominated world, so the plan is to make it crash as hard as possible and try to duck the radiation.  They're fucking cockaroaches mayne.

Sun, 06/28/2015 - 05:16 | 6243606 Gavrikon
Gavrikon's picture

Cockroaches with LOTS of gold.

Sat, 06/27/2015 - 19:20 | 6242735 honestann
honestann's picture

Hahaha!  So much for the claim by so many gringos that "unlike westerners, Chinese learn from history"!  Hahaha!  And yes, my ancestors are Chinese.  The morons!

Humans are morons... not just this group or that.  Virtually ALL of them.

Sat, 06/27/2015 - 18:48 | 6242634 Sudden Debt
Sudden Debt's picture

A lot of Chinese will turn into slaves to pay the interest on those loans for their stocks.

 

Sat, 06/27/2015 - 16:45 | 6242262 lakecity55
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That which floats up will soon come down.

Got PMs, Bit-Chez?

Sat, 06/27/2015 - 15:09 | 6242013 Salzburg1756
Salzburg1756's picture

Float like a BRIC!

Sat, 06/27/2015 - 14:20 | 6241847 the grateful un...
the grateful unemployed's picture

these guys haven't learned anything from the fed, reflate reflate reflate

Sat, 06/27/2015 - 19:00 | 6242689 Antifaschistische
Antifaschistische's picture

The most amazing thing is.....their stock market has only retraced the gains of the last two months....LOL...and it's a meltdown.  It's amazing that two months of gains generates a 370 billion margin call.

Sat, 06/27/2015 - 17:10 | 6242318 disabledvet
disabledvet's picture

Excellent point...however not even the Federal GOVERNMENT can "reflate" an economy...let alone a Bank that is only capable of lending to a Government "without interest" (meaning depositors get nothing.)

"Reflation" can only occur if the economy itself produces free cash flow...goods and services sold at the "cash register" or in the physical commodites space.

In short somewhere somehow a physical DOLLAR (cash market) must be traded...in the case dollar(long) yen(short.)

So insofar as Wall Street is concerned "all trading opens 7:30PM Tokyo time" and ALL prices are set hence forth in those terms.

CREDIT markets then open at 9:30 AM New York time with the opening of the "New York Stock Exchange." To the extent the "global economy" is extended ANY credit it will be on that exchange and in terms of the US dollar and either "buy high/sell low" or "short high/cover low."

First cash settlement occurs when "Europe" closes...12:30 PM Eastern Standard time.

Everything else is counterfeiting.

Sat, 06/27/2015 - 14:15 | 6241833 GRDguy
GRDguy's picture

Fools and their money are soon separated.

Sat, 06/27/2015 - 14:02 | 6241807 KnuckleDragger-X
KnuckleDragger-X's picture

Welcome to the jungle......

Sat, 06/27/2015 - 14:02 | 6241806 Fukushima Fricassee
Fukushima Fricassee's picture

Bullish !

Sat, 06/27/2015 - 13:25 | 6241705 Creepy A. Cracker
Creepy A. Cracker's picture

So the Chinese housewives working in the rice paddies are now all back to plowing their money (50 cents per day income) into the U.S. stawk markets.  up, Up, UP!!!!

Sat, 06/27/2015 - 21:03 | 6243003 philipat
philipat's picture

There's a difference. China's debt is ALL internal. The US, not so much......

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