China’s margin curbs threaten rally in stock market favourites
Investors chasing fast-moving trends face more uncertainty, as margin access can disappear quickly
[BEIJING] A rule aimed at curbing exposure to overvalued stocks is posing another challenge to China’s market, just as renewed Sino-American trade tensions have abruptly stalled the rally this month.
The rule, in place since 2016, bars investors from using stocks with a price-to-earnings (PE) ratio above 300 as collateral to borrow funds for buying shares, either of the same company or others. Thanks to a rally fuelled by enthusiasm for artificial intelligence (AI), the number of mainland-listed firms that now exceed this PE threshold has surged about 30 per cent on-year to 236, Bloomberg-compiled data show.
Roughly a quarter of them, including chip designer Cambricon Technologies and Hua Hong Semiconductor, are in the tech sector.
While intended to curb risky bets on overpriced stocks, the rule is contributing to sharp moves in already volatile sectors such as AI, semiconductors and rare earths.
Investors chasing fast-moving trends face more uncertainty, as margin access can disappear quickly. This instability could trigger deeper sell-offs and weaken confidence in a fragile market.
The equity benchmark CSI 300 rallied for five months to September and is now down 1 per cent this month.
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“After a strong rally, tech and other high-valuation stocks may be overpriced, so it might be better to wait for a clear pullback before considering them,” said Kenny Ng, a strategist at China Everbright Securities International.
The policy drew investor attention earlier this month when shares of China’s top chipmaker Semiconductor Manufacturing International Corporation (SMIC) tumbled after brokerages halted margin financing. Access was partially restored later as SMIC’s PE ratio dropped below 300, with one broker allowing investors to use up to 70 per cent of the holdings as collateral.
Chipmaker Biwin Storage Technology also faced margin restrictions, which were later eased to 50 per cent.
China’s chipmakers, many of which have seen valuations soar after outperforming global peers, make up a large portion of the basket of companies now facing potential margin restrictions. Among them, Cambricon and Hua Hong Semiconductor are the largest by market value, both having more than doubled in share price this year amid the AI boom.
Other impacted sectors include steel and defence, with companies such as Inner Mongolia BaoTou Steel Union and Avic Aviation Engine also potentially facing restrictions.
Price swings
Stocks placed under margin restrictions have seen sharp price swings, often to the downside. Shenzhen Manst Technology is down 15 per cent, while Fujian Tianma Science & Technology Group has fallen 10 per cent after margin changes earlier this month.
The outstanding margin purchases of some stocks, a measure of risk appetite, has also started to drop this month after the rule took effect, according to Eastmoney data. That’s a sign investor sentiment is cooling.
“By eliminating high leverage, the appeal of these stocks has diminished, particularly for investors who engage in leveraged speculation,” said Xiang Xiaotian, director at Shanghai Chengzhou Investment Management. BLOOMBERG
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