A shipping container and gantry crane lie beyond a fishing boat near Yangshan Deep Sea Port in Shanghai, China, Wednesday, December 6, 2023.
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China’s stock market rally has come under increased regulatory scrutiny after trading activity surged to unprecedented levels, with authorities moving to rein in leverage even as many investors say the bull market is still in its early stages.
Daily trading volumes on the Shanghai, Shenzhen and Beijing stock exchanges reached record highs consecutively from Monday to Wednesday last week, according to Wind Information, a China-focused financial data service. Trading volume on Wednesday reached 3.99 trillion yuan ($556 billion), surpassing the previous high of 3.48 trillion yuan set in October 2024.
Earlier this year, the benchmark CSI 300 hit a four-year high. This comes after the index posted its highest annual gain since 2020.
Market veterans told CNBC that the surge brought back memories of past market excesses, particularly the 2015 boom-bust cycle.
Chinese regulators have responded by tightening credit lending rules, including increasing collateral requirements for new credit transactions.
Under the latest rules, which took effect on Monday, margin requirements for credit purchases have increased from 80% to 100% across the three exchanges. This means that investors must pay the full cost of the shares upfront while still trading under existing margin rules, effectively eliminating borrowing on new margins.
Morgan Stanley said the tightened regulations signaled an “overheating” of onshore market activity and sentiment, referring to renminbi-denominated stocks (A shares) traded in mainland China by domestic and approved foreign investors.
The investment bank’s weighted A-share market sentiment activity index rose to 91% in recent days, surpassing the 90% threshold for the first time since September 2024, mainly due to a surge in trading volume.
Recently, the trading volume on the mainland has exploded to record highs. Credit financing has also reached a high level.
Hao Hong
growth investment group
“The tightening of regulations comes as record sales have pushed sentiment indicators to overheating levels,” Morgan Stanley analysts said in a note.
However, they expect further liquidity support for both A-shares and Hong Kong stocks to continue into the first quarter.
Foreign investors have stepped up their activity, with net inflows exceeding $50 billion in recent months, a significant increase from a year ago, according to data provided by Skybound Capital.
Even so, foreign participation remains small compared to the size and trading volume of the A-share market as a whole. Theodore Shaw, chief investment officer at Skybound Capital, said domestic investors continued to drive the rally.
Retail investors account for about 90% of daily trading volume in China’s land-based stock market, according to HSBC data. This is in sharp contrast to major overseas markets, where trading is dominated by institutional investors and retail investors account for only about 20-25% of the New York Stock Exchange’s trading volume.
Develop a slower bull?
The dominance of domestic capital has shaped regulators’ approaches to leverage.
In China’s stock market, leverage arises primarily through margin financing, where investors borrow from securities companies to purchase stocks, amplifying both profits and losses. Higher leverage in such an environment can accelerate the rally quickly, but it also makes it more vulnerable to sudden reversals if sentiment changes.
“Recently, the mainland’s trading volume has exploded to an all-time high. Credit financing has also reached a high level,” said Hao Hong, chief economist at Grow Investment Group. “So regulators are trying to tweak leverage to create a ‘dull bull market.’”
Other market participants said the recent margin adjustments were not indicative of systemic risk concerns, but appeared to be designed to curb speculative excess and facilitate this “moderately bullish” market.
“This situation can best be described as ‘structural overheating,’ and is concentrated in specific sectors, such as AI and technology stocks, many of which have recently gone public and are attracting strong speculative interest.”
Shaw also pointed to growing divergence across Chinese exchanges as evidence that enthusiasm remains selective. The ChinaNext board has soared nearly 50% in the past six months, far outpacing the slower rise in the Shanghai Composite Index.
