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China's Margin Mania In Context, The "Striking" Comparison With The US And Japan

Tyler Durden's picture




 

On Friday, in “China’s Margin Debt Is Easily The Highest In The History Of Global Equity Markets,” we reminded readers that despite the rapid unwind taking place in China’s backdoor margin lending channels, the deleveraging still has a long way to go. “There is a lot more margin debt unwinding yet to come which also explains the unprecedented panic by Chinese authorities to step in and prevent the ongoing market crash at all costs,” we said. 

We also highlighted a note from Goldman in which the cephalopod remarked that “as of the beginning of June, the balance of margin financing outstanding was RMB2.2tn, an estimated 12% of the free float market cap of marginable stocks.” 

While that was remarkable, JP Morgan notes that the figure was actually far higher for the SHCOMP, hitting nearly 18% as of July 3. 

And while that figure has declined by nearly a third since, “the outstanding balance remains well above the 8% seen last November just before the big rally started, or the 2% seen only three years ago.” 

JPM goes on to discuss how, consistent with the somewhat counterintuitive experience of the US, tougher margin requirements have led to an upsurge in volatility in China:

But consistent with past US experience, changes in Chinese margin requirements in recent months appear to have had the undesirable impact of increasing rather than lowering volatility and only had a temporary impact on the volume of margin transactions. This is shown in Figures 2. This figure shows the behavior of equity volatility around dates when announcements were made related to margin trading. This shows that these announcements caused more often an increase rather than decrease in equity volatility, perhaps inducing retail investors to shift to riskier stocks to achieve higher leverage. 

 


As for how China’s margin lending stacks up to the US and Japan (the only two large economies where reliable data are available), well, as you might have expected, there simply is no comparison:

In terms of the amount of leverage, China stands well above the equivalent levels for the US or Japanese equity markets. Figure 4 shows the amount of NYSE margin debt as % of the free float of the US equity market. To make it comparable to that of China as shown in Figure 1 we have to multiply the 2.7% ratio of Figure 4 by two to transform it into transactions, i.e. we assume 50% leverage the maximum under Regulation T. So the ratio of margin transactions as % of market cap likely stands at around 5.5% in the US currently which is well below the 13.7% for the Chinese equity market. The comparison with Japan is even more striking at first glance as the ratio of margin transactions as % of market cap is less than 1.0% (Figure 5).

 


Keep in mind that the figures shown above for China likely understate the case, as there really isn't a reliable way to measure the amount of leverage buried in the shadowy confines of umbrella trusts, structured funds, and other off-the-books vehicles. 

As the unwind continues, the social instability narrative is becoming more prevalent (see "Why China's Stock Collapse Could Lead To Revolution") as is the notion that the vaporization of trillions in paper gains will dent consumer sentiment and derail whatever economic momentum China has left. On that note we'll close with the following from JPM: 

Ceteris paribus (e.g. for a given level of household equity ownership), this not only points to elevated volatility in Chinese equities relative to other markets, but also potentially higher transmission of equity market shocks to Chinese households. 

 

 

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Sat, 07/11/2015 - 13:20 | 6299410 Looney
Looney's picture

If our economy is the cleanest dirty shirt, than China’s economy is the cleanest skid-marked briefs… or boxers ;-)

Looney

Sat, 07/11/2015 - 13:33 | 6299450 Boris Alatovkrap
Boris Alatovkrap's picture

Ancient China philosophy for providential living:

Yuan mei king mo ni? Bo lo tsu bai, se ling bi fo aza fu lu!

Sat, 07/11/2015 - 16:19 | 6299869 Lost My Shorts
Lost My Shorts's picture

What is more, China's financial markets and regulation thereof are the cleanest basement of an outhouse.

It cracks me up all the doomers who say China will take over the role of global steward of reserve currency any day now.

Sat, 07/11/2015 - 13:30 | 6299439 Kaiser Sousa
Kaiser Sousa's picture

"The People’s Bank of China (PBOC) also rolled over 250 billion yuan of medium-term loans to banks late on Friday to ensure adequate liquidity in the system.

“The government must rescue the market, not with empty words, but with real silver and gold,” said Fu Xuejun, strategist at Huarong Securities Co, before the CSRC and PBOC announcements, adding that a market crash would hurt banks, consumption, companies and even trigger social instability. “It’s a disaster. If it’s not, what is it?”

http://www.theglobeandmail.com/report-on-business/international-business...

Sat, 07/11/2015 - 14:16 | 6299553 Dubaibanker
Dubaibanker's picture

The data is moving as mysteriously as Kaiser Soze!

Just another important statistic, FYI for all:


 Amount of Money Borrowed to Buy Shares Falls by One-Third from Peak
Sat, 07/11/2015 - 13:32 | 6299446 Richard Chesler
Richard Chesler's picture

1.4 billion gambling addicts lol

 

Sat, 07/11/2015 - 13:36 | 6299460 Boris Alatovkrap
Boris Alatovkrap's picture

West is replace opium with sophisticated market instrument, but even today Western capitalism is corrupt China.

Sat, 07/11/2015 - 13:36 | 6299459 Racer
Racer's picture

Great way to instill confidence to any potential big buyers... no you can't sell if you buy and you need the money.

Sat, 07/11/2015 - 13:38 | 6299464 Boris Alatovkrap
Boris Alatovkrap's picture

China is stuff channel, and now is face consequence of no new buyer. This is not solution to over leverage, but is simply delay of inevitable.

Sun, 07/12/2015 - 08:17 | 6301697 ptolemy_newit
ptolemy_newit's picture

That russian adul mate now with slim women of east future the look is Euresia.

 

tell something is wrong with China full of everything raw, why not crush and to sub sahara they move next?

 

 

Sat, 07/11/2015 - 13:39 | 6299467 wedderburn
wedderburn's picture

fewer iPhone sales over there then

Sat, 07/11/2015 - 13:53 | 6299497 Obama LaForge
Obama LaForge's picture

I'm moving to China in a couple weeks. I ain't gonna miss the revolution!

Sat, 07/11/2015 - 18:38 | 6300344 Dindu Nuffins
Dindu Nuffins's picture

It'll be televised. The Hunger Games get a new sequel.

Sat, 07/11/2015 - 13:55 | 6299502 Consuelo
Consuelo's picture

 

This:

 

"As for how China’s margin lending stacks up to the US and Japan (the only two large economies where reliable data are available), well, as you might have expected, there simply is no comparison:"

How do we define 'reliable', within the context of 'Trustworthy' data and the entities from whence such data proceeds forth...?

 

And this:

 

"Keep in mind that the figures shown above for China likely understate the case, as there really isn't a reliable way to measure the amount of leverage buried in the shadowy confines of umbrella trusts, structured funds, and other off-the-books vehicles."

Again, the term 'reliable' makes an appearance.     I wonder if there is a 'reliable' (or Trustworthy) mechanism for determining the amount of leverage buried in the shadowy confines of (U.S. based xxxxx fill-in-the-blanks)...?

 

 

 

Sat, 07/11/2015 - 13:56 | 6299506 kaiserhoff
kaiserhoff's picture

What does margin debt mean when no one can sell stocks to raise cash?

Curiouser and curiouser.

Sat, 07/11/2015 - 13:58 | 6299510 T-NUTZ
T-NUTZ's picture

Bullish!

Sat, 07/11/2015 - 13:59 | 6299513 disabledvet
disabledvet's picture

THIS IS THE SECOND LARGEST ECONOMY IN THE WORLD.

NO ONE IN HONG KONG GIVES A RATS ASS WHATS GOING ON IN FUCKING. SHANGHAI.

Sat, 07/11/2015 - 14:27 | 6299581 brucekeller
brucekeller's picture

Can they make margin calls illegal?  Probably not. :)

Sat, 07/11/2015 - 14:42 | 6299621 Jus7tme
Jus7tme's picture

Is it possible that the Shanghai market is dominated by "retail level" debt at 13+% of market cap, whereas the NYSE at ~2.8% retail-level margin debt does not include all the OTHER debt that finances stock purchases by non-retail entities such as hedge funds and corporate stock buybacks (how are those even accounted for?).

In other words, what I am saying is that the numbers perhaps reflect that the Shanghai debt level is dominated by the debts of SMALL investors,  while the NYSE numbers do not include the debt of the BIG linvestors.

Great article, though. I wish there was more real data on the hidden debts used to finance stock purchases, and especially in the US. I'm sure those numbers are a closely garded secret.

Sat, 07/11/2015 - 18:58 | 6300417 thestarl
thestarl's picture

To me it seems like China is just one fucking big roach infested motel?

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