If there’s one capital markets-related story that just never seems to get old it’s the unrelenting rally in Chinese stocks. The country’s equity mania truly is the gift that keeps on giving, and not just for those who are riding the wave, but also for those who, like us, appreciate the humor in a giant, margin-fueled bubble that’s captivated millions upon millions of semi-literate housewives and banana vendors [4] turned day traders. Unfortunately, Chinese regulators threw a bit of cold water [5] on the party last month, suggesting a move to curb margin lending may be in the cards.
Nevertheless, a new note from Macquarie suggests the margin madness may be just getting started. Because investors can borrow 86 yuan for every 100 yuan they have in collateral, margin debt could “theoretically” balloon from 1.7 trillion yuan to a hilarious 9.4 trillion yuan, a 461% increase. Here’s more via Bloomberg [6]:
Openings of Chinese brokerage accounts have surged in recent months as has the take-up of margin accounts which offer investors the ability to borrow against their stock portfolios…
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How high could the whole thing go, you ask? The Macquarie analysts estimate that, at an extreme, investors could borrow RMB 85.7 for every RMB 100 of collateral in their portfolios. That suggests the theoretical ability to increase margin finance loans from the current 1.7 trillion yuan to as much as 9.4 trillion yuan, or 461 percent higher than the current level. While it's doubtful that would ever happen (banks, after all, do not have unlimited lending capacity and the government has already instituted some curbs on margin lending) even a moderate increase in margin borrowings could be meaningful. At 3.2 percent of total market cap, China's margin debt has already eclipsed bubble-era Japan as well as pre-Asian Financial Crisis Korea...
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Huatai Securities and Tebon Securities raised margin requirement for margin trading and short selling to control risks, Shanghai Securities News reports, without citing anyone.Haitong Securities cut the amount that clients could use securities as collateral for margin trading and short selling.
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