On Friday, in “China’s Margin Debt Is Easily The Highest In The History Of Global Equity Markets [9],” 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 [11]") 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.


