China’s stock markets tumbled
on Friday to near bear territory further deepening the sell-off that
started two weeks ago. The Shanghai Composite, down 7.4% on the day,
has fallen 19% from its June 12 high wiping out $1.25 trillion in market
cap. The smaller Shenzhen and ChiNet indices also has plunged 20% from
its recent peak.
Margin Lending Blessed by Beijing
Even with recent declines, the Shanghai Composite Index has surged nearly 30% year-to-date. Authorities have allowed local investors to borrow tons of money from brokers to speculate in
the stock market (i.e., Margin Lending), while the central bank PBOC
has cut interest rates three times since November. Beijing also
introduced new easing measures in
the past couple of days: a proposal to remove a cap on banks’
loan-to-deposit ratio and injecting cash into the financial system.
Investors
have poured into the market, opening 33 million new brokerage accounts
between the start of January and the end of May. According to Macquarie
Research, Chinese margin debt has risen 123% year-to-date, reaching a
new record of 2.3 trillion yuan ($370 billion) on June 18.
Margin
debt in China has reached 8.5% of the value of China’s tradable shares
(For comparison purpose, that ratio was only at 4.6% during the peak of
the Taiwan Stock Market Bubble back in the late 80's).
Margin Debt Could Get Even Worse
It
gets even better from there. Macquarie believed that the brokers
should have enough capital available to push margin lending higher from
here as reported by Bloomberg:
"We
think that the peak should be somewhere around RMB 3 trillion and at
the current run rate (ie +16% month-on-month) the market would reach
that level around September."
Analysts Cutting Price Target
Investors
have started to pull out of the market on concerns the government could
be looking to rein in this debt-fueled rally. Meanwhile, more and more
analysts are also sounding louder alarms about the over-heated China
market. For example, citing concerns like valuations and high margin
debt, Morgan Stanley just lowered its price target for the Shanghai
benchmark in a report Thursday.
The
usually quick-tongued state media like Xinhua are staying unusually
quiet not giving out clues about the government's view on the current
market sell-off.
Reuters quoted Zhang Xiaojun, a spokesman for the China Securities Regulatory Commission on Friday:
"It's
a self-adjustment of the market after earlier excessive gains...
Recently, there has been more volatility in the stock market. That
requires all sides to treat it rationally."
Chinese
authorities are already trying to discourage speculative bets on the
highest-flying stocks. So these rare public comments from the Regulatory
Commission seem to suggest authorities are 'comfortable' with the
declines.
$370 Billion in Margin Trades
A stock market collapse would be devastating to China with slowing economy and during a difficult transition from a manufacturing-based economy to private-business-and-consumer-supported.
People are already freaking out that Greece is just days away from defaulting on
a $1.72 billion loan payment. Just wait till the margin call on the
$370 billion margin debt in China's stock markets should Beijing decide
to take a page from Saudi Arabia's oil book.