Investors follow financial information at a securities brokerage in Shanghai. The Shanghai Composite tumbled 43% from its June 12 high through August 26 as investors cut leveraged bets by more than $200bn.
Bloomberg
Shanghai
US-listed Chinese companies and exchange-traded funds tracking A shares fell after China moved to contain leveraged wagers on its stock market. Stock exchanges cut by half the amount of borrowed money investors can use to buy shares, as authorities seek to prevent a repeat of the excesses that led to a $5tn rout earlier this year.
Margin requirements will be raised to 100% from 50% starting on November 23, the Shanghai and Shenzhen bourses said in separate statements after local exchanges closed on Friday. The rule change means that an investor with 1mn yuan ($156,895) in their account is limited to borrowing another 1mn yuan from a broker to buy more shares. Previously, they could borrow as much as 2mn yuan.
A Bloomberg index of American depositary receipts on Chinese stocks including Alibaba Group Holding Ltd declined 4.2% at the close in New York, the most since August 24.
The Deutsche X-trackers Harvest CSI 300 China A-Shares ETF, the biggest US exchange-traded fund investing in mainland shares, lost 3.3% to $36.18. The Market Vectors ChinaAMC A-Share ETF fell 3.4% to $45.88. Mainland stock-index futures dropped 2.2%.
“While it might have a negative impact in the very short run, I think ultimately it’s a very good thing in the long-run,” Brendan Ahern, managing director at Krane Fund Advisors in New York said by phone on Friday. It will “certainly will help de-risk, or take down, some of the inherent volatility in the market.”
While the move is likely to weigh on investor sentiment when mainland markets re-open on Monday, the Shanghai bourse said it will help prevent systemic risks from building in China’s financial system.
Surging margin debt helped amplify the record-breaking boom - and subsequent bust - in Chinese stocks earlier this year as ready access to leverage gave the country’s millions of individual investors increased buying power.
The step to increase margin requirements came as China’s top graft-buster announced on Friday an investigation into Yao Gang, one of four vice chairmen at the nation’s securities regulator, as the government deepens its crackdown on the financial industry. Margin financing, which shrank by more than half during the rout, has been rising for six straight weeks as the Shanghai Composite Index bounced back into a bull market.
The decision to tighten investor access to the loans comes a week after regulators lifted a freeze on initial public offerings, removing one of the key measures of support for equities.
Margin debt and volume rose “rapidly” in recent weeks as some investors bought shares trading at high valuations, the Shanghai exchange said in a post on its Weibo account explaining the rule change.
The move will help reduce leverage and ensure “healthy development” of the market, it said.
“This is just regulators trying to keep markets from overheating,” Gabriel Wallach, founder and portfolio manager at North Grove Capital in Boston, said by phone on Friday. “The positive interpretation is that they feel comfortable enough with the fundamentals and the market level.”
Officials face a balancing act: if they crimp margin financing too soon, it could derail the bull market and reduce household wealth in an economy increasingly reliant on consumer spending. If they wait too long, the build-up of debt could threaten stability in the financial system and magnify the next market downturn.
The Shanghai Composite tumbled 43% from its June 12 high through August 26 as investors cut leveraged bets by more than $200bn.
The rout was only halted after the government took unprecedented steps to prop up share prices, including banning major shareholders from offloading shares, ordering state funds to buy stocks and restricting short selling.While a gauge of 60-day price swings on the equity gauge has dropped from an 18-year high in September, volatility is still the most extreme among global benchmark indexes tracked by Bloomberg.
“Increasing margin requirements is a prudent decision,” said Gerry Alfonso, a sales trader at Shenwan Hongyuan Group Co in Shanghai. “While in the short term this decision could impact the equity market, in the mid to long run it would help decrease volatility.”
