BEIJING, Jan 28 (Reuters) — Chinese regulators will launch a fresh investigation into stock margin trading, and banks have been told to tighten supervision of their lending practices to ensure loans aren’t funnelled into stock markets, three sources with direct knowledge of the matter said.
The China Securities Regulatory Commission and the China Banking Regulatory Commission did not respond to request from Reuters seeking comment.
The news comes as Beijing moves cautiously to suppress the excessive use of debt to make aggressive bets on Chinese stock markets, which have gained around 40 per cent since November.
Chinese regulators are generally supportive of the recent stock market rally, as it has proven to one of the few bright spots in the country’s financial markets in recent months, as house prices slide and yields on fixed-income products come under pressure.
However, the rally is also seen as becoming disconnected from economic fundamentals and company earnings as the world’s second-largest economy looks set to see growth slow further in 2015.
Mainland stock markets have seen dramatic crashes in the past, but the risk has been amplified this time around given liberalisations made to the way brokerages can allow investors to bet using borrowed funds.
Since most stock market trades in China are done by ordinary retail investors, the prospect of a crash similar to the one that occurred in the aftermath of a 2009 rally is worrisome, both in terms of potential wealth destruction and political fallout if the legions of new investors who jumped into the market find themselves abruptly and deeply in debt.
“Regulators have been signalling since November and December that they were worried about the direction of investment, requiring banks to investigate and ensure liquidity didn’t flow into the stock market,” said one of the sources.
Stock market speculation
That concern led to the punishment of three of the country’s largest brokerages for improper allocations of trading margin earlier in January. At the same time, banking regulators made moves to curb abuse of short-term forms of credit in the interbank market that were similarly seen as being used for stock market speculation.
Reports of previous investigations and regulatory clampdowns caused a dramatic plunge in stocks on Jan. 19, with main indexes tumbling over 7 per cent in a single day.
Regulators followed up by reassuring the market that they were not trying to suppress the rally, but while markets recovered, so did the usage of leverage for margin trading, which hit a record high of 778 billion yuan (Dh457 billion, $124.5 billion) on Tuesday.
“The impact of industry overcapacity, local government debt, shadow bank and property risk on the capital markets is not negligible,” China Securities Regulatory Commission chief Xiao Gang said in a report on the CSRC website. His comments were made in a speech at an industry conference in Beijing earlier in the month.
“The scale of margin trading has grown rapidly, exceeding 1 trillion yuan by the end of 2014, with trading leverage rising obviously. Some brokerages have borrowed short-term money but lent as long-term loans, facing relatively high liquidity risk.”
