China’s margin trades surge to a record amid stock rally

Chinese investors are borrowing a record amount of cash to buy local stocks, further fuelling a months-long rally that has largely been driven by liquidity.

The outstanding amount of margin trades in China’s onshore equities market climbed to 2.28 trillion yuan (S$415 billion) on Monday (Sep 1), surpassing the previous record of 2.27 trillion yuan in 2015. Traders added such leveraged positions for all but three days in August.

The world’s second-biggest stock market has been rallying since April, partly reflecting optimism that China’s breakthroughs in artificial intelligence and efforts to cut overcapacity will revive growth. In the absence of potent fiscal or monetary stimulus, whether Chinese households will use some of their US$23 trillion cash pile to invest is seen as key to the next leg of the bull run.

“Margin financing was likely the main source of new funds entering the stock market in August,” according to China Merchants Securities analyst Zhang Xia. Active stock funds have seen net purchases and the registered size of equity-focused hedge funds have increased significantly since July, “all indicating that residents’ funds are beginning to accelerate allocation into the stock market,” he wrote in a note.

The onshore CSI 300 Index gained 10 per cent last month, its best performance since last September when a policy blitz triggered a short-lived rally. The jump also made the benchmark one of the world’s top performers last month. The gauge lost 0.7 per cent on Tuesday, snapping a three-day winning streak, with chip stocks leading the decline following their recent surge.

The retreat was “more of de-risking or profit taking after a strong run year-to-date,” said Xin-Yao Ng, a fund manager at Aberdeen Investments. The record margin trading data also spurs a fear of “rising market speculation.”

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Latest official data show that the number and combined size of newly registered hedge funds, which mostly invest in equities, both rose to the highest this year in July. New stock accounts opened by retail investors also jumped 71 per cent in July from a year earlier.

Meanwhile, China’s household deposits fell 0.7 per cent from a record high in June to 160.9 trillion yuan in July, suggesting investors are putting their money to work.

Also fuelling investor enthusiasm were expectations that authorities will keep sentiment supported before the Sep three military parade, which is set to mark the 80th anniversary of the end of World War II. China has a history of propping up its stock market ahead of major political events to project an image of stability.

The liquidity-led rally has also sparked a debate among Wall Street analysts over the market’s outlook, given that China’s economic fundamentals haven’t improved much. Those at Goldman Sachs Group have raised their CSI 300 target while others at Morgan Stanley have pointed to early signs of overheating, cautioning improving corporate fundamentals and stronger policy support are needed to sustain the rally.

While margin trades have expanded, the size of China’s stock market also has nearly doubled in the past decade. The amount of leveraged purchases as a proportion of total market capitalisation was 2.2 per cent as of Monday, slightly above the 10-year average but far below 2015’s peak of 4.6 per cent.

“Margin financing and new-account openings are rising but not at extremes, indicating the market is not in a bubble,” said Jasmine Duan, senior investment strategist at RBC Wealth Management Asia. “Liquidity tailwinds can persist in the near term, therefore A-shares should still have some room to run.” BLOOMBERG