Hong Kong: China’s brokers have raised more capital this year than in the past three combined — and more than half the $14 billion (Dh51.4 billion) proceeds are being ploughed straight back into financing the equity boom that enabled them to tap the markets in the first place.

The frenzied rallies in Shanghai and Shenzhen this year have been largely fuelled by margin lending where loans to invest in the market are secured against the stocks purchased. Margin-financed long positions in the onshore A-Share market now total Rmb1.9 trillion, or $307 billion — up 84 per cent this year, and four times the level this time last year, according to Macquarie analysts.

The sharp rise has stoked fears it could reverse almost as quickly: if the value of margin-financed portfolios were to fall, lenders would demand more collateral or reduce the size of loans, either of which could trigger forced selling.

Yet more than half of the $9.5 billion of equity raised in Hong Kong this year by brokers will be used to finance more margin loans, according to the companies’ filings. Still more funds will soon be added to the financing pool after Huatai Securities on Friday priced its initial public offering in Hong Kong at the top end of the range, raising a further $4.5 billion.

If its underwriters exercise an option to sell more shares when it begins trading on June 1, Huatai could raise a further $700 million, making it the biggest IPO in Hong Kong since AIA raised $20 billion in 2010, according to Dealogic.

“Brokers are the perfect stock in this market — they’re a leveraged derivative on what’s going on in China,” said one equities banker, who described the mainland rally as a “state-sanctioned bull run”.

The Shanghai Composite closed last week at a seven-year high, up 44 per cent this year amid trading volumes that topped $150 billion on Friday. Shenzhen, home to start-ups, tech stocks and biotech groups among others, has nearly doubled and hit its fifth record high in as many days on Friday.

Huatai has already said that 60 per cent of the proceeds from listing will go towards margin financing, in line with its rivals who have already tapped the Hong Kong markets. Chinese investors opened almost 5 million new share trading accounts in the first two weeks of May alone, Macquarie said.

Tapping international investors via Hong Kong has been brokers’ preferred route. GF Securities raised $4.1 billion in a Hong Kong IPO in March while China Galaxy Securities sold new shares worth $3.1 billion in a private placement in April. At least half of each of those funds will go into the brokers’ lending businesses, including margin financing.

“This capital is being immediately redeployed, there’s no cash drag and they’re not accumulating a war chest,” said one banker involved in the deals.

Haitong Securities, which has been clear about its international expansion plans, also raised $4.2 billion in a private placement this month — of which 60 per cent is earmarked for margin finance.

Citic Securities is widely expected to tap the market via a private placement with plans to raise more than $4 billion.

Financial Times