As fears that Chinese equities, which recently surged to seven-year highs, are due for a correction, mainland investors who want to make money from the stock market suddenly find themselves facing a funding squeeze.
Asset managers, securities firms, trust companies — the main sources of funds used for leveraged trading — have tightened the screws for lending and cut the amount of money that investors can borrow though demand for such financing remains strong, according to Caixin.
As a result, the growth of margin trading and short-selling has slowed down dramatically recently, the report said. After expanding 6%-7% on March 5 to April 16, margin trading and short-selling rose 1.4%-5.1% on April 23-June 4.
Chinese investors, particularly the retail ones, have resorted to borrowing money to fund their stock market investments, helping ignite the recent rally.
Citic Securities, one of the lender for margin trading, has increased the required guarantee deposits and lowered the amount of money that investors can borrow vis-à-vis their own capital, the report said.
The funding squeeze and tighter requirements drove some mainland investors to Hong Kong, where brokerages are offering lower margin financing costs and bigger amount of loan to cover their stock purchases in the Chinese stock market.
In a recent report, Bloomberg said that while brokerages in China slap borrowers with an 8% interest on margin financing, their Hong Kong peers are charging less than that, with some as low as 7%. On the loan amount, Hong Kong brokers offer funding to cover as much as 80% of stock purchases, while in China it is up to 70% only.
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