HONG KONG (BLOOMBERG) - It didn't take long for the flood of borrowed money to come pouring back into Chinese stocks.
After a two-day decline spurred by regulatory efforts on Jan. 16 to curb margin lending by some of China's biggest brokerages, the value of shares purchased with borrowed cash has rebounded to an all-time high. The outstanding balance of margin debt on the Shanghai Stock Exchange climbed to a record 771.4 billion yuan (S$165.77 billion) on Monday (Jan 26), up from about 751 billion yuan on Jan 20.
China's suspension of new margin accounts at three of the nation's biggest brokerages and notice to ban loans to traders with less than 500,000 yuan has done little to damp the enthusiasm of leveraged investors. After tumbling 7.7 per cent on Jan 19 in the biggest one-day rout since 2008, the Shanghai Composite Index rallied to a five-year high on Monday.
"Margin debt is still growing rapidly and is probably against the will of the regulators," said Mr Hao Hong, a strategist at Bocom International Holdings in Hong Kong. "The regulator wants market stability but is also trying to find a way to rein in speculation. It is between a rock and a hard place."
The China Securities Regulatory Commission on Jan 16 banned Citic Securities, Haitong Securities and Guotai Junan Securities from adding margin-finance and securities lending accounts for three months, following rule violations. It also said securities firms shouldn't lend to investors with assets below 500,000 yuan, prompting the biggest drop for the margin debt balance in Shanghai in 19 months.
The Shanghai Composite declined 1.9 per cent to 3,319.67 at the midday break on Tuesday after data showing a slump in industrial companies' earnings. The gauge is still up 63 per cent during the past 12 months for the biggest gain among global stock indexes.
The regulator isn't trying to curb equity trading, it said on Jan 19. Policy makers took action "to protect investors' rights and support the healthy growth of margin trading," CSRC spokesman Deng Ge said, according to a statement on the regulator's website.
In a margin trade, investors use their own money for just a portion of their stock purchase, borrowing the rest from a brokerage. The loans are backed by the investors' equity holdings, meaning that they may be forced to sell when prices fall to repay their loan.
"There is obvious demand for margin debt," said Mr Gerry Alfonso, a China equity sales and trading director at Shenwan Hongyuan Group in Shanghai. "Local retail investors seem to continue to be bullish on the market."