SHANGHAI: China's stock market slump in January led to a wave of calls for investors to top up cash in their margin trading accounts, triggering fears that a further slide in share prices could spur forced selling of tens of billions of dollars worth of stocks.
The country's blue-chip CSI300 Index tumbled 6.3 per cent last month, plumbing five-year lows, as a raft of government support measures failed to revive confidence dented by an ailing economy.
With stock prices falling, major shareholders in China-listed companies who had borrowed against their holdings now face margin calls, that is calls to top up the collateral they placed with lenders.
The value of shares that face the risk of forced liquidation as a result totals 183.6 billion yuan ($26 billion), up 26 per cent from end-November, Zheshang Securities estimates.
The market's drop has also hurt investors who borrow money from brokerages to buy shares, via so-called margin trading accounts, forcing them to either sell those shares or put up fresh cash to make sure there is adequate collateral.
Zheshang Securities estimates such investors were forced to unwind 43.6 billion yuan of stock holdings in mid-January.
"Everyday, we are making margin calls," said Hannah Feng, who works at a major brokerage in Shanghai.
"As the market keeps falling, some clients repaid the margin loans and quit the game."
Brokers worry that the falling market will create a dangerous loop in which forced liquidation and plunging share prices feed each other.
A further 10% slide from the current market levels could trigger margin calls worth nearly 100 billion yuan, Guotai Junan Securities estimates. Another 20% decline could potentially lead to forced selling worth roughly 360 billion yuan.
FRAGILE CONFIDENCE
To be sure, the total value of leveraged bets in China's stock market is much smaller than in 2015, when reckless borrowing fed a bubble that burst in an messy way. Regulators have also since rooted out illegal borrowing via shadow banking.
In a sign investors are rapidly unwinding leveraged bets, outstanding margin loans shrank by nearly 100 billion yuan in January to a one-year low of 1.55 trillion yuan, 30% below a 2015 peak.
Margin loans are currently equivalent to 2.3% of China's total stock market capitalisation.
But with China's economy suffering from a shaky post-COVID recovery, a deepening property crisis and geopolitical tensions, signs of stock market deleveraging could dent already fragile confidence.
Mr. Gao, who works at a Shanghai-based outlet of a major brokerage, said he makes more than a dozen margin calls every day to clients whose pledged shares shrink in value.
"Most of our clients supplemented collaterals after receiving the calls, or sold the stocks to pay back the borrowed money," said Gao, who declined to disclose his full name.
An increasing number of big shareholders of listed companies who borrowed against their stocks also face margin calls from banks or brokerages.
So far this year, nearly 100 listed companies have disclosed that major shareholders are stumping up additional collateral, while stressing they don't yet face the risks of forced liquidation.
On Friday alone, 14 companies, including Aoshikang Technology Co, Shenzhen Sunxing Light Alloys Materials and Shenzhen Centralcon Investment made such announcements following recent plunges in their shares.
There is the risk that a swathe of pledged shares fall and trigger margin calls, and the forced selling "could drive share prices even lower, creating a negative loop in the stock market," Liang Fengjie, analyst at Zheshang Securities said in a report. ($1 = 7.1793 Chinese yuan renminbi) -Reuters