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China Raises Scrutiny of Margin Trading
From the Wall Street Journal of Sat, 13 Dec 2014 03:50:00 EST
Investors look at stock information at a trading hall of a securities firm in Shanghai. Chinese regulators are stepping up scrutiny of margin trading.
Investors look at stock information at a trading hall of a securities firm in Shanghai. Chinese regulators are stepping up scrutiny of margin trading. Agence France-Presse/Getty Images

SHANGHAI—China’s securities watchdog said it would conduct spot checks on some brokerages’ margin trading business, signaling regulators’ growing concerns about the risky investment practice that has contributed to a recent rally in the country’s stock market.

At a weekly news conference on Friday, the China Securities Regulatory Commission said the spot checks were part of a broader quarterly exercise and were meant to ensure the “orderly” development of the relatively new margin trading business, according to transcripts published via the commission’s Weibo microblog account.

The CSRC said stock investment-related lending business such as margin trading has witnessed a “rapid development” and reached “a large scale” this year, but it added that it hasn’t issued so-called “window guidance,” or verbal warnings, to Chinese brokerages in a bid to control relevant risks.

A rise in margin trading, where investors borrow money for securities firms to buy stocks, has been a key driver behind the wild ride in China’s stock market in recent weeks, prompting concerns that these risky bets could lead to heavy losses for many inexperienced retail investors and an abrupt end to the rally.

The benchmark Shanghai Composite Index has gained nearly 20% over the past three weeks, triggered by Beijing’s first interest-rate cut in more than two years and an earlier launch of a trading link between the Shanghai and Hong Kong exchanges.

Margin trading peaked on Nov. 24, when it accounted for a record 18.2% of total trading volume, before gradually sliding to 17.2% Monday and 10.8% Friday, according to data provider WIND Info. The figure stood at 8.6% at the beginning of this year.

Trading on margin magnifies the potential gains for investors if shares rise, but deepens losses if they fall.

The decline in the scale of margin trading this week came after the Shanghai market plunged 5.4% on Tuesday, its biggest single-day drop in more than five years.

The sudden pickup in volatility has caught many traders off-guard and led to heavy losses for many inexperienced retail investors.

China investors have found it increasingly easier to take on such leveraged bets in recent years after brokerages gradually reduced the minimum amount of assets required for margin trading to as low as 50,000 yuan ($8,085) compared with 500,000 yuan when regulators launched the program in 2010.

The market’s rapid gains and often wild daily swings have prompted some brokerages, including Sinolink Securities and China Securities, to take some measures to discourage investors from margin trading.

These moves include raising the ratio between the amount of principal and margin loans, as well as lowering the ceiling on loans available for individual stocks.

The CSRC said on Friday that it has kicked off a project to amend existing rules overseeing brokerages’ margin trading business, adding that it will consult the public when “conditions are ripe.” It didn’t give other details.

Write to Shen Hong at

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