Chart of the Day: Investors Rush to Borrow More as Stock Markets Rally
As Chinese mainland stocks rally after a year of poor performance, investors are rushing to borrow money to fuel a share-buying spree.
The benchmark Shanghai Composite Index closed at 3,027.58 on Monday, up 22.8% since the beginning of 2019. The index rose by 5.6% on Feb. 25, when it met the bar for a bull market.
The outstanding amount of margin debt, the value of shares that investors bought with borrowed money, reached 796.2 billion yuan ($103.93 billion) after the markets closed on Friday, according to data from the Shanghai and Shenzhen stock exchanges. That’s up 12% since Feb. 1.
In the last 10 trading days through Friday, most of the borrowed money has been used to buy shares in brokerages, insurance companies and telecommunication companies, according to financial information platform iFind.
When investors borrow money to buy stocks, it means they believe the stocks’ prices will rise in the future, while when they borrow stocks to sell them, it means they believe the stock prices will fall.
The outstanding value of margin debt and borrowed shares reached 804.6 billion yuan on Friday, of which margin debt accounted for 99%.
The reason why investors are buying brokerage shares is that the increasing transaction volume boosts brokerages’ secondary market business, and the imminent launch of the high-tech board will increase equity investment, which will improve brokerages’ business in the primary market, according to a report by Guosheng Securities Co. Ltd.
As margin trading booms, so is unregulated and illegal margin financing, which is provided by unregulated channels such as trust companies and online margin financing platforms and is considered a big contributor to China’s 2015 stock market crash. The China Securities Regulatory Commission said it has noticed the issue and will monitor stock transactions more closely.
Contact reporter Liu Jiefei (firstname.lastname@example.org)
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