(Bloomberg) — Chinese stocks wiped out gains after authorities raised the minimum margin requirement for financing securities purchases to 100%, the latest policy effort to curb risks.
Under the new rule, investors must now provide margin equal to the full value of the securities they buy on credit, up from the previous 80% threshold, according to a Shenzhen Stock Exchange statement. The move, which applies to Shenzhen, Shanghai and Beijing bourses, underscores regulators’ efforts to tighten risk controls in the capital markets.
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The CSI 300 Index erased an 1.2% advance to fall, while Chinese stocks traded in Hong Kong also briefly wiped out gains.
Equities had a strong start to the year as risk appetite improved on the country’s technological advances, with margin loans jumping and turnover hitting records. Benchmarks have been hovering at multi-year highs, pushing relative strength indexes to overbought territories. The rally has been particularly intense for tech stocks, with the Star 50 Index up more than 9% in January.
“This sends a clear signal from regulators that they want a slow bull market, not an overheated one,” said Yang Guang, a fund manager at Yuanxi Private Fund Management Partnership. “If that’s not enough to slow down the rally, there will be follow-up measures.”
The higher margin requirement doesn’t stop local funds and retail investors from taking bets on local stocks, but it does reduce the amount they can deploy without increasing their capital. Regulators sometimes use tweaks to margin financing rules to push back against periods of heavy buying, or to combat risks of leverage.
The outstanding balance of leveraged trades has been on a steady rise this year, reaching a record high of 2.7 trillion yuan ($387 billion) as of Tuesday.
Authorities, aiming to engineer a slow bull run, have previously attempted to cool market gains getting ahead of fundamentals. In September, China’s financial regulators were said to be considering a number of measures including removal of some short selling curbs.
“The following moves may be more, specific or perhaps heavy handed than this one,” said Shao Qifeng, chief investment officer at Ying An Asset Management Co. Still, “Going by experience from 2015, the market is likely going to get over this shock pretty quickly as it will move on momentum.”
