China's $370 Billion Margin Call
EconMatters | Jun 28, 2015 02:00AM ET
China’s stock markets tumbled on Friday to near bear territory further deepening the sell-off that started two weeks ago. The Shanghai Composite, down 7.4% on the day, has fallen 19% from its June 12 high wiping out $1.25 trillion in market cap. The smaller Shenzhen and Chinext indices also has plunged 20% from its recent peak.
Margin Lending Blessed by Beijing
Even with recent declines, the Shanghai Composite Index has surged nearly 30% year-to-date. Authorities have allowed local investors to borrow tons of money from brokers to speculate in the stock market (i.e., Margin Lending), while the central bank PBOC has cut interest rates three times since November. Beijing also introduced new easing measures in the past couple of days: a proposal to remove a cap on banks’ loan-to-deposit ratio and injecting cash into the financial system.
Margin Debt Soared to $370 Billion
Investors have poured into the market, opening 33 million new brokerage accounts between the start of January and the end of May. According to Macquarie Research, Chinese margin debt has risen 123% year-to-date, reaching a new record of 2.3 trillion yuan ($370 billion) on June 18.
Margin debt in China has reached 8.5% of the value of China’s tradable shares (For comparison purpose, that ratio was only at 4.6% during the peak of the Taiwan Stock Market Bubble back in the late 80's).
Margin Debt Could Get Even Worse
It gets even better from there. Macquarie believed that the brokers should have enough capital available to push margin lending higher from here as reported by Bloomberg :
"We think that the peak should be somewhere around RMB 3 trillion and at the current run rate (ie +16% month-on-month) the market would reach that level around September."
Get The News You Want
Analysts Cutting Price Target
Investors have started to pull out of the market on concerns the government could be looking to rein in this debt-fueled rally. Meanwhile, more and more analysts are also sounding louder alarms about the over-heated China market. For example, citing concerns like valuations and high margin debt, Morgan Stanley (NYSE:MS) just lowered its price target for the Shanghai benchmark in a report Thursday.
Plunge Leaves State Media Speechless
The usually quick-tongued state media like Xinhua are staying unusually quiet not giving out clues about the government's view on the current market sell-off.
a difficult transition from a manufacturing-based economy to private-business-and-consumer-supported.
People are already freaking out that Greece is just days away from defaulting on a $1.72 billion loan payment. Just wait for the margin call on the $370 billion margin debt in China's stock markets should Beijing decide to take a page from Saudi Arabia's oil book.
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.