Or why China margin-loan curbs are now sinking stocks
3 things to note:
1. The amount of shares purchased using borrowed money - known as margin trading - has surged more than tenfold in the past two years to a record 1.1 trillion yuan ($179 billion), or about 3.5 per cent of China's market capitalization. In that same period, the Shanghai Composite Index has gained 37 per cent, including a 58 per cent rally during the past 12 months that topped every other stock exchange index worldwide.
2. In a margin trade, investors use their own money for just a portion of their share purchase, borrowing the rest from a broker. The loans are backed by the investors' stock holdings, meaning that they may be forced to sell shares when prices fall to repay their debt. The Shanghai and Shenzhen exchanges expanded the number of stocks available for margin trading to 900 from 695 in September.
3. The Shanghai index tumbled as much as 6.5 per cent on Monday morning, heading for the steepest retreat since August 2009, after China suspended three of the nation's biggest brokerages from adding margin-finance accounts because of rule violations. Citic Securities Co., the nation's biggest listed securities firm, said on Monday it raised the minimum requirement for opening margin accounts to 500,000 yuan from 300,000 yuan.
Source: Bloomberg News