Margin Lending for Stock Purchases Hits Nearly Two-Year High

Investors at China’s two major stock exchanges have borrowed 1 trillion yuan ($151 billion) as margin loans, the most in nearly two years, to magnify their bets, data from the bourses show.

Margin financing was seen by the Chinese government as one of the factors that fueled speculative trading that led to the market meltdown in 2015. But now, loans for share purchases have picked up again as investors are betting on an uptrend of stocks after China’s smooth leadership reshuffle at last month’s National Party Congress, and in light of improving economic prospects.

On Wednesday, outstanding margin loans for Shanghai-listed stock purchases totaled 593 billion yuan, and 407 billion yuan for Shenzhen-listed stock purchases.

“The strong increase in margin financing underlines the recovery of market sentiment and a growing appetite for risk,” said Shen Meng, director of Beijing-based Chanson & Co., a boutique investment bank. “That reflects a bullish perspective of A-share market for the coming months.”

Margin loans, in which investors borrow money from brokerages to buy stocks after paying a fraction as deposits, have been a barometer of investor sentiment in the Chinese mainland stock market since such lending was officially allowed in late 2011.

Outstanding margin loans had stayed above the 1-trillion-yuan mark from December 2014 to June 2015, when such loans reached a record 2.27 trillion yuan. It was then followed by a sharp correction that wiped out 30% of the A-share market valuation in just four weeks.

The world’s second-largest stock market now has a market capitalization of nearly $8.6 trillion. The benchmark Shanghai Composite Index has gained 9% this year through Thursday.

In the recent ongoing market rally that started midyear, leveraged purchases of stocks have been concentrated in sectors that included manufacturing, finance and mining, according to data compiled by financial service provider Wind Info.

For example, margin loans for purchasing shares of Ping An Insurance Co. and BOE Technology Group Co. have each surpassed 4 billion yuan. Investors have also borrowed more than 3 billion yuan as margin loans to buy Fangda Carbon New Material Co., whose share price has more than doubled this year.

Xun Yugen, chief strategist of Haitong Securities Co., added that improving earnings expectations of listed companies will also lift investor sentiment. Xun added that net profit of the entire A-share universe rose 18.3% in the third quarter from a year ago.

The market, as usual, is not one-sidedly optimistic.

Bears warn that a tighter liquidity condition and ongoing regulatory crackdown on financial misdeeds could make the market volatile, triggering margin calls or forced sell-offs among highly leveraged investors.

The Shanghai Composite Index retreated 0.34% to 3,371.74 points by Friday, while the Shenzhen Component Index dropped 0.68% to 11,215.19 points.

Contact reporter Leng Cheng (chengleng@caixin.com)