As Chinese stock market capitalization topped $10 trillion for the first time in history, so the spectre of total and utter speculative mania looms as the balance of margin loans tops $2.2 trillion and remains among the most obvious early warning systems for an increasingly fragile government-sponsored equity bubble. The problem, as Bloomberg reports, is that any pullback by margin traders would undercut one of the biggest drivers of the rally leaving the "regulator trying to slow down the growth without triggering panic," as Bocom's chief China strategist explains.
As Bocom's Hao makes clear in the following chart...
“If margin loan growth starts to decelerate notably, the market will slow down. If non-compliant margin lending accounts must be closed, the market will crash.”
The China Securities Regulatory Commission is planning to curb the amount of margin finance and short selling to no more than four times a brokerage’s net capital, according to draft rules posted on its website June 12. There is currently no ceiling. The CSRC is also considering allowing brokerages to roll over margin trading and short-selling contracts, instead of closing them out after six months, which may quell volatility if the rally falters.
“Guiding markets like this with regulatory measures is incredibly hard to do,” said Michael Every, the head of financial markets research at Rabobank International in Hong Kong.
China’s stock-market tumble of 2008 shows how quickly investor confidence can evaporate, even in the absence of margin calls. The Shanghai Composite fell more than 70 percent in the 10 months ended Nov. 4, 2008, after jumping more than 400 percent in the previous two years. However, some confidently see no hiccups...
Leveraged investors have made so much money from rising stock prices that it would take a “big market slump” for them to start unwinding positions, said Yuliang Chang, the Hong Kong-based head of Chinese equities at Deutsche Bank AG.
"There are ample buffers given how much A shares have rallied,” Chang said.
But, as Bloomberg concludes, brokerages across China are already tightening requirements for lending to stock investors to try to limit their exposure to any market bust. GF Securities Co., Haitong Securities Co. and Changjiang Securities Co. have all raised margin requirements.
For leveraged investors who get caught in the next downturn, the losses may erode their faith in the stock market, said Neoh.
“A lot of people will lose money,” he said. “And it would be a long time before they will return to the markets.”
* * *
Following the last week or two's action suggests the exuberance is stalling...
* * *
We will know it's all over when the PBOC or CSRC says the word "contained."