China revives support for margin trading that fueled boom-bust

[NEW YORK] China's policy makers are loosening controls on margin lending in the stock market.

China Securities Finance Corp, the state-backed agency that provides funding to brokerages for margin trading, will restart offering loans to securities firms for periods ranging from seven days to 182 days, according to a statement posted on its website Friday. The agency will cut interest rates on the debt to as low as 3 per cent, it said. China's offshore equity-index futures rose.

The amount of shares purchased on margin has plunged more than 60 per cent from last year's pre-rout peak as traders fled the world's worst-performing stock market and regulators made it harder for investors to access loans. Speculation last week that officials were relaxing such restrictions helped revive trading volume and send a gauge of small-cap shares in Shenzhen to its biggest weekly gain on record.

"The loosening could reignite interest in the equity market, particularly as the regulators' actions last year - to rein back private sector broker leverage - helped trigger the correction in equity prices," said Koon Chow, senior macro and currency strategist at Union Bancaire Privee in London.

"It does look like they want a second chance at growing the equity market. We shall all be watching very closely whether leveraged buying of the equity market balloons again."

Moves in the Shanghai Composite Index over much of the past two years have closely tracked appetite for leveraged bets, which fell to the lowest level since Dec 2014 last week. A surge in margin loans fueled the stock boom in the first half of last year, and exacerbated the slump that followed.

Non-Brokerage Lending

The Shanghai gauge rallied 5.2 per cent last week, paring its losses for 2016 to 17 per cent. The ChiNext index of small- cap stocks jumped 13 per cent in Shenzhen amid speculation some commercial banks have resumed non-brokerage margin lending. The practice was banned by regulators last summer, according to Guotai Junan Securities Co. Futures on the FTSE China A50 Index rose 0.5 per cent at the close on Friday.

China Securities Finance was established in 2011 to lend money and securities to brokerages to facilitate margin trading and short selling. It's also the agency that was equipped with trillions of yuan to buy equities amid last year's rout.

Lower Rates

The rate for 182-day loans will be cut to 3 per cent, while that for 91 days will be lowered to 3.2 per cent, the agency said. The 28-day lending rate will be reduced to 3.3 per cent, while 14-day and seven-day costs will fall to 3.4 per cent, it said. In a margin trade, investors use their own money for just a portion of a stock purchase and borrow the rest. The loans are backed by their investments, meaning that they may be forced to sell to repay the debt when prices fall.

"The potential risks could be the brokerage firms misusing the leverage," said Wayne Lin, New York-based money manager at QS Investors LLC, whose firm oversees US$17 billion assets including emerging market exchange-traded funds.

"If they use it for market making then it's good. If they use it for speculation then it's bad." The announcement is the first significant policy change by the new head of the nation's securities regulator, according to Michael Shaoul, chief executive officer of Marketfield Asset Management. Liu Shiyu was appointed chairman of the China Securities Regulatory Commission a month ago after his predecessor was criticized for mismanagement.

"The securities agency's move is more of a normalization and unwinding of restrictions that they've put in place a year ago," Mr Shaoul said in New York.

"I don't think they have any wish to go back to the crazy margin-driven rally in 2015, but they'd be comfortable with a gradual increase in margin lending past this point."

BLOOMBERG