Wed, Jun 24, 2015 - Page 14 News List

China stock market rout putting US$364bn at risk

UNWINDING BETS:Losses on margin positions on the Shanghai and Shenzhen exchanges threaten to magnify declines as traders sell their shares to meet call payments

Bloomberg

The biggest tumble in Chinese shares since 2008 is proving especially painful for margin traders as their favorite stocks sink faster than the benchmark index, raising the risk of forced liquidations.

The 30 equities in Shanghai with the highest levels of margin debt relative to tradeable shares have dropped 17 percent on average since the market peaked on June 12, versus a 13 percent decline for the Shanghai Composite Index. Margin positions on the city’s bourse fell for the first time in a month on Friday last week, a sign that leveraged investors are unwinding bets after they grew more than five-fold in the past year.

With at least US$364 billion of borrowed money riding on stocks in Shanghai and Shenzhen, losses on those positions threaten to magnify market declines as traders sell their shares to meet margin calls.

“It’s a self-fulfilling prophecy,” Roshan Padamadan, the founder and manager of Luminance Global Fund, said in an interview on Bloomberg Television from Singapore. “As people try to book profits, they’ll find out that there’s nobody on the other side of the trade.”

The Shanghai Composite gained 2.2 percent at the close yesterday, rebounding from an intraday drop of as much as 4.8 percent.

In a margin trade, investors use their own money for just a portion of the stock purchase, borrowing the rest from a brokerage. The loans are backed by the investors’ equity holdings, meaning they may be compelled to sell to repay their debt when prices fall.

“You can see from Friday’s sharp decline that people are already cutting losses on margin trading,” said Mari Oshidari, a Hong Kong-based strategist at Okasan Securities Group Inc. “This is still ongoing, so we should watch out for further selling pressure.”

While margin debt has surged in recent months, it is still at manageable levels relative to the size of China’s US$8.8 trillion stock market, said Marco Polo Pure Asset Management chief executive Aaron Boesky, which runs a China-focused hedge fund.

Investors should take advantage of market declines to increase holdings, Boesky said, anticipating the Shanghai Composite could rally another 36 percent to surpass its all-time high in October 2007.

“It is best to buy the dips,” he said in an e-mail on Sunday. “Consolidation allows for those already high returns to sell and take profit, and those who have resisted jumping into the market to now have an appetizing entry point.”

Margin traders have been such an important source of demand for Chinese shares that any pullback, particularly one caused by regulatory efforts to curb the use of leverage, will weigh on the market, Partners Capital International (博大資本國際) chief executive Ronald Wan (溫天納) said in Hong Kong.

Almost all of this year’s biggest declines in the Shanghai Composite, including a 6.5 percent slump on May 28, were sparked by investor concerns over margin-trading restrictions.

The China Securities Regulatory Commission is planning to curb the amount of margin trades and short sales financed by brokerages to no more than four times their net capital, according to draft rules posted on its Web site on June 12.

Brokerages, including GF Securities Co (廣發證券) and Haitong Securities Co (海通證券), have already tightened lending requirements to limit their exposure to any market downturn.

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