Why China Margin-Loan Curbs Are Sinking Stocks: Chart of the Day

China’s efforts to cool the growth of margin trading may curb one of the biggest drivers of the nation’s world-beating equity rally: the use of borrowed money to buy stocks. The CHART OF THE DAY shows the amount of shares purchased on margin has surged more than tenfold in the past two years to a record 1.1 trillion yuan ($179 billion), or about 3.5 percent of the nation’s market capitalization. The Shanghai Composite Index has gained 37 percent in that period, including a 58 percent rally during the past 12 months that topped every other benchmark equity gauge worldwide. The Shanghai measure tumbled as much as 6.5 percent today, 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 today it raised the minimum requirement for opening margin accounts to 500,000 yuan from 300,000 yuan. “The jump in the outstanding values of margin trading in the short term does mean the risk is building up,” said Xie Weiyu, a strategist at Shenyin & Wanguo Securities Co. in Shanghai. It may “become the major focus for the regulators to cool the market. If a correction starts, the magnitude will be bigger than the past few years.” In a margin trade, investors use their own money for just a portion of their stock purchase, borrowing the rest from a broker. The loans are backed by the investors’ equity holdings, meaning that they may be forced to sell 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. To contact Bloomberg News staff for this story: Zhang Shidong in Shanghai at szhang5@bloomberg.net; Billy Chan in Hong Kong at bchan101@bloomberg.net To contact the editors responsible for this story: Michael Patterson at mpatterson10@bloomberg.net Richard Frost