Yesterday, when we heard that China brokers may impose tighter margin requirements to contain what is now a laughable stock bubble we said that tonight’s Shanghai session could get exciting:
China may get exciting: Some China Brokers Raise Margin Trading Requirement: Sec. News
— zerohedge (@zerohedge) May 4, 2015
It did: overnight the Shanghai Composite tumbled by 4.1% to under 4300, the biggest one day drop since January 19.
Additionally, the Shanghai Stock Exchange Property Index falling 8% although keep in mind that the sub-index added 52% in 3 months to end-April on relentless hopes of central bank easing the worse the economic data got. The rout also spread to Hong Kong where the HSI dropped as much as 1.9%, down 4th day in longest loss streak since March 11.
While it is too early to know if the Chinese stock bubble has finally burst, it is just as unclear what precipitated the selloff. On one hand Reuters attributes the drop to the previously noted collateral concerns saying “media reports of tougher margin requirements by some brokerages added to concerns about market liquidity ahead of a new batch of share listings.” Specifically, brokerages such as CITIC Securities Co Ltd, Haitong Securities Co Ltd and Huatai Securities Co Ltd tightened requirements for margin financing this month in a bid to control risks, the Shanghai Securities News reported on Tuesday.
This is major concern for China where the unprecedented jump in margin debt coupled with an explosion in new accounts has been the primary driver behind the relentless rise in the Shanghai Composite. “The move could curb money inflows in a highly-leveraged stock market rally. The outstanding value of margin financing – the amount of money investors have borrowed to buy stocks – has exceeded 1.8 trillion yuan ($290 billion) and repeatedly smashed records in recent sessions.”
“I suspect the brokerages are doing so under the guidance of regulators, so this reflects regulators’ intentions,” said Zhang Chen, analyst at Shanghai-based hedge fund manager Hongyi Investment. “It gives an excuse for some investors to take profit.”
