ANALYSIS-Record $322 billion in China loans for stock bets feeds volatility and prompts caution

China's investors borrowed a record $322 billion to buy stocks this year, but sharp corrections this week and heightened regulatory scrutiny to cool overheated markets are now making them jittery about the leveraged bets.

While risks for China's broader financial system have been elevated for months due to deflation in the economy and a persistent property debt crisis, the stock investors' recent actions could add more pressure. Outstanding margin financing in China, a key gauge of sentiment and leverage level, hit a record 2.3 trillion yuan ($321.55 billion) this week. And some speculators are diverting consumer loans to stock trading.

Those helped Shanghai stocks hit 10-year highs last week in a liquidity-driven rally despite a weak economy and simmering trade and geopolitical tensions. But China's blue-chip CSI300 Index slumped 2% on Thursday after Bloomberg News reported, citing sources, that regulators are considering measures to cool the market.

Cassiel Jiang, who borrowed 200,000 yuan to buy stocks for a quick profit, said she was a bit shocked by the increased volatility this week, when many stocks rose or fell 3% to 5%. "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 planned to reduce leverage so that she "could sleep well at night".

While highly leveraged market bets are not new to China, the mounting concerns of retail investors and regulators underscore the risk of bubbles forming in the world's second-largest economy. In a sign of the regulatory caution, China's top securities regulator Wu Qing pledged last week to "consolidate the good trend of the market" by actively promoting "long-term, rational, value" investment.

Chinese tech bellwether Cambricon, which is in Jiang's portfolio, plunged 15% on Thursday after doubling in market value to 668 billion yuan in August. The artificial intelligence chipmaker, seen as China's answer to Nvidia, is among its most popular targets for speculators, who borrowed over 10 billion yuan to bet on the surging stock for outsized profit, according to exchange data.

Steven Leung, executive director of institutional sales at UOB Kay Hian in Hong Kong, said that the record amount of margin financing has made the market more vulnerable. "If there's any measure trying to cool down the market, these people, especially those using margin financing, have to get out first," he said.

CONSUMER LENDING Even as the Chinese government, which this month started offering interest subsidies for consumer loans, has urged banks to beef up risk management on such lending, some stock investors find it to be a lucrative borrowing source.

Retail investor James Liu taps consumer loans for stock buying. Interest rates are around 3% for consumer lending, compared with 4% or 5% for brokerage margin loans, "so of course I would first borrow from banks", he said. Although banks bar consumer loans from flowing into stocks, Liu, a tech worker in southwestern Sichuan province, said he moved the money between various accounts and the chance of being caught was slim.

Meanwhile, a growing number of banks, including China Minsheng Bank, Hekou Rural Commercial Bank and Wenshan City Commercial Bank, have recently cautioned against illegitimate use of credit card loans for investments. As consumers remain reluctant to spend in a struggling economy, "less creditworthy consumers remain as active borrowers, leading to higher asset risks for lenders", ratings agency Moody's wrote.

In a sign that brokerages are also heeding risks, Sinolink Securities raised margin requirements in late August. To be sure, margin financing currently accounts for just 2.3% of China's free-float share capitalisation, compared with a peak of 4.7% a decade ago, when the market was much smaller.

There are also few signs of the extent of retail euphoria and illegal shadow bank borrowings that helped fuel China's epic stock bubble in 2015. "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". ($1 = 7.1529 Chinese yuan renminbi)

(This story has not been edited by Devdiscourse staff and is auto-generated from a syndicated feed.)