China's $1 trillion stock rally triggers curbs from brokers, funds

A $1 trillion stock rally in China is sparking concerns over growing risks to investors, prompting some of the nation’s brokerages and fund managers to cut back on financing and limit purchases. 

In the first such public move, Shanghai-based Sinolink Securities Co. raised its margin deposit ratio on new client financing contracts for some securities to 100 per cent, according to a posted notice. China last approved a cut in the ratio to 80 per cent from 100 per cent in September 2023. 

Meanwhile, a number of domestic mutual fund houses this week imposed daily purchasing restrictions on some of the year’s best performing portfolios. On Wednesday, the feeder fund for the GF Star Growth Index ETF proceeded to cap buying at just 100 yuan ($14), one of the most drastic limits yet during this rally.  

The Sinolink margin increase was prompted by concern over potential losses for clients should there be a correction after the recent sharp rise in the stock market, people familiar with the matter said, asking not to be identified discussing private deliberations. It’s unclear whether recent moves were triggered by regulatory guidance. 

China’s onshore stock benchmark retreated on Wednesday, finishing the session 1.5 per cent lower. A measure of Hong Kong-listed Chinese shares also slid by a similar magnitude.   

“The market is worried that regulators turn toward a deleveraging tone, which may require more brokers to tighten the margin ratio,” said Jason Chan, a senior investment strategist at Bank of East Asia. “It affects not only the retail investors, but it will tighten the general liquidity condition of the market, because many institution investors purchase stocks with leverage too.” 

This month alone, China stocks have added more than $1 trillion to their market value. The Shanghai Composite Index has hit a decade-high and the CSI 300 Index has surged more than 20 per cent from this year’s low. The rally has also been driven by cash-rich investors shifting into stocks amid a lack of alternatives. Trading volumes on mainland exchanges hit more than 3.1 trillion yuan ($433 billion) on Wednesday, the second highest ever. 

“There may be some bubble in some pockets in the market; this brokerage may be voting to play it safe and to mitigate risks for itself and its clients,” said Chen Shi, fund manager at Shanghai Jade Stone Investment Management Co., referring to Sinolink’s move. “But I don’t think this in itself is a signal of a top forming.” 

The outstanding balance for margin trading, a barometer for market sentiment, reached over 2.1 trillion yuan this week, a level last seen in June 2015 when stocks were in the height of an epic boom. Analysts have pointed out the ratio of newly added margin purchases reached nearly 12 per cent of turnover on Friday to top a high in October, potentially showing a degree of fear of missing out as much of the trading is made on borrowed cash. 

Flocking to the market, retail investors opened 71 per cent more new stock accounts in July than the same month last year, according to exchange data. 

Chinese authorities have a track record of intervening when stocks are seen as overheated or oversold, including with rules on margin trading and short selling. 

Since August 2023, when markets were sliding, authorities have rolled out restrictions that included a ban on lending shares during lock-up periods for short selling and higher margin requirements for hedge funds and investors to borrow securities. Those restrictions were further tightened through 2024.