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China margin trading balance balloons to record high

[SHANGHAI] Chinese investors' borrowing to trade on the country's stock markets - the force behind their extraordinary recent performance - has surpassed 2 trillion yuan for the first time, figures showed on Friday, highlighting the risks in the rally.

Data from China's two exchanges in Shanghai and Shenzhen showed the combined outstanding balance of margin trading transactions - the use of borrowed funds on the stock markets - at 2.03 trillion yuan (S$436 billion) by the end of trade on Thursday.

Under the practice, investors only need to deposit a small proportion of the value of their trade, generating bigger profits for a given amount of money put down - but also bigger losses.

"The growth of margin trading is making the market way too heated and risky," Yingda Securities chief strategist Li Daxiao told AFP.

"Investors are borrowing money without any substantial collateral. They will face enormous risks once the market changes direction," he said.

The China Securities Regulatory Commission (CSRC) cracked down on margin trading in January, causing the Shanghai market to slump 7.70 per cent, its biggest one-day fall since 2008.

But the index resumed its rise. As of Thursday, Shanghai was up more than 40 per cent so far this year, while Shenzhen had surged 91.7 per cent.

The margin trading balance has doubled in just six months. It surged above 1 trillion yuan on December 19 last year for the first time since March 31, 2010, when China's market regulator first allowed the practice.

The Shanghai market was the world's best performer among global markets in 2014, with a 52.87 per cent jump for the year, in a borrowing-fuelled rally following four years in the doldrums.