China’s stock market overheats on $322 billion in loans

Chinese investors borrowed about $322 billion to buy stocks this year, which pushed indexes up, but this week’s drop and tougher signals from regulators have shaken confidence.

Outstanding margin financing reached a record 2.3 trillion yuan ($321.55 billion) this week. Some traders also routed consumer credit into brokerage accounts. That wave of liquidity helped push Shanghai shares to 10-year highs last week despite weak growth and ongoing trade and geopolitical worries.

Sentiment flipped on Thursday when the blue-chip CSI300 Index fell 2% after Bloomberg News reported, citing sources, that authorities are studying ways to cool trading.

Cassiel Jiang, who borrowed 200,000 yuan to chase quick gains, said the week’s swings were unnerving as many stocks moved 3% to 5% in a day.

“If you haven’t taken profit at a peak, you wonder if you should cut the loss after you start bleeding,” said the 35-year-old programmer in Beijing. Jiang said she plans to reduce leverage so she “could sleep well at night.”

Leveraged activity has long been part of China’s market, but growing unease among retail players and a sharper tone from watchdogs highlight the risk of froth in the world’s second-largest economy.

Showing caution, China’s top securities regulator Wu Qing pledged last week to “consolidate the good trend of the market” by advancing “long-term, rational, value” investment.

Tech stocks no longer a safe bet

Speculation around big tech names has cooled quickly, as per Reuters. Cambricon, a stock Jiang owns, sank 15% on Thursday after its market value doubled to 668 billion yuan in August.

The AI chipmaker, often compared with Nvidia, has been a magnet for leveraged punters; exchange figures indicate that more than 10 billion yuan of borrowed funds piled into the name.

The build-up amplifies downside risk, said Steven Leung, executive director of institutional sales at UOB Kay Hian in Hong Kong. The record level of margin finance, he said, leaves the market more exposed. He added, “If there’s any measure trying to cool down the market, these people, especially those using margin financing, have to get out first.”

James Liu, a retail investor in Sichuan, said he taps consumer credit with rates near 3%, below the 4%–5% typically charged for margin at brokerages.

While banks prohibit directing such funds into equities, Liu said he moves money through several accounts and sees little chance of being flagged.

Caution ahead despite market support

Banks are pushing back. China Minsheng Bank, Hekou Rural Commercial Bank, and Wenshan City Commercial Bank have recently warned customers not to use credit card loans for investing.

With consumption still weak, “less creditworthy consumers remain as active borrowers, leading to higher asset risks for lenders,” ratings firm Moody’s wrote.

Policy makers continue to back the market but want to avoid excess.

“The government has made it very clear that they are supportive of the equity market,” said Eugene Hsiao, head of China equity strategy at Macquarie Capital. “That said, policymakers are wary of boom-bust cycles similar to the margin-trading bubble in 2014-2015,” he said, expecting the government to “rein in excessive speculative flows.”