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China Doubles Margin Requirement for Stocks
World Economy

China Doubles Margin Requirement for Stocks

China moved to contain leveraged wagers on its stock market, cutting 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 $5 trillion rout earlier this year.
Margin requirements will be raised to 100% from 50% starting on Nov. 23, the Shanghai and Shenzhen bourses said in separate statements after local exchanges closed on Friday. The rule change means that an investor with 1 million yuan ($156,895) in their account is limited to borrowing another 1 million yuan from a broker to buy more shares. Previously, they could borrow as much as 2 million yuan, Bloomberg reported.
While the move is likely to weigh on investor sentiment when mainland markets reopen 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.
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.
China stock-index futures dropped 1.9% in Singapore.
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.
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 Aug. 26 as investors cut leveraged bets by more than $200 billion. 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.

 

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