Shanghai Margin Trades Shrink Most in Three Years Before Holiday

by Bloomberg News

(Bloomberg) -- Chinese traders reduced holdings of stocks purchased with borrowed money by the most in three years as cash needs increased before the week-long Lunar New Year holidays.
The outstanding value of margin debt on the Shanghai Stock Exchange fell 3.1 percent on Feb. 13 to 779.2 billion yuan ($124.9 billion), according to data from the bourse. That’s the biggest drop since Jan. 20, 2012, when it slid 4.8 percent.
Some investors in the world’s second-largest economy are raising cash to pay for gifts and food before the holidays, which start on Feb. 18 and will spur the Shanghai exchange to shut through Feb. 24. The benchmark Shanghai Composite Index has jumped 52 during the past year, the best performance among major markets tracked by Bloomberg, as central bank stimulus encouraged traders to boost margin debt to an all-time high earlier this month.

“Some investors have chosen to hold cash instead of stocks when the market is shut for so long,” Wei Wei, an analyst at West China Securities Co., said by phone from Shanghai. “They want to be less exposed to uncertainty during the holidays. The fundamentals of the market haven’t changed.”
The outstanding value of margin trading on the
Shanghai exchange rose to a record 805.1 billion yuan on Feb. 11, with leveraged stock purchases surging more than 10-fold over the past two years.
Chinese authorities have taken steps to cool the use of borrowed money. The securities regulator suspended new margin accounts at three of the nation’s biggest brokerages last month and issued a notice to ban loans to traders with less than 500,000 yuan.
In a margin trade, investors use their own money for just a portion of their stock purchase, borrowing the rest from a brokerage. The loans are backed by the investors’ equity holdings, meaning that they may be forced to sell when prices fall to repay their loan.