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Investing On The Margin

THERE IS NO better indication of how global stock markets are being moved by what some older readers will recall as “the weight of money”. On January 19, Chinese equities fell by 7.7%, the most in a single day since the midst of the global financial crisis in 2008. The previous Friday, regulators reined in margin trading, recently at record levels in the Shanghai and Shenzhen exchanges. Speculative money turned tail.

Regulators are worried that the recent piling in by individual investors on the back of borrowed money is getting too risky. Outstanding margin loans totaled 1.1 trillion yuan ($177 billion) as of January 16th, up from some 400 billion yuan at the end of June. That is equivalent to 3.5% of the stock market’s overall capitalization.

Investors have been egged on by the Shanghai and Shenzhen exchanges, which last September expanded the number of stocks available for margin trading to 900 from 695. That helped make Chinese equities amongst the world’s biggest gainers last year.

Securities regulators have slapped a number of brokerages over the wrist, including China’s two largest listed securities firms, Citic Securities and Haitong Securities, for unauthorized lending to new clients who want to trade equities and to investors with less than 500,000 yuan in investable assets. The banking regulators are stopping banks lending to companies that borrow to invest in traded financial assets.

The securities regulators say that they are not trying to curb equity trading, but have acted to “protect investor’s rights and support the healthy growth of margin trading.” All true as far as it goes. Yet money goes where it can but only stays where it is welcome. Even if regulators haven’t taken away the punch bowl, they have swapped it for a smaller one.

Chinese investors now have a less than sanguine choice of where to put their money. It could go into a stock market they are being told looks too frothy, a housing market bubble that is being deflated, and financial products being sold by shadow banks, another potential disaster waiting to happen.

Each of the latter two has offered examples of what can weigh upon a market when liquidity drains away, and the fundamentals reapply. Now the first has, too.

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