Chinese investors borrow most in 6 years as market skyrockets

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Chinese investors are borrowing money to buy stocks at the fastest pace in six years, helping to fuel an almost 5% rally in the A-share market over the past month. But there is a lot of betting that some stocks will fall.

As of June 1, the outstanding margin trading balance on the Shanghai and Shenzhen stock exchanges stood at 1.73 trillion yuan ($ 271 billion), the highest since July 2015.

The CSI 300 index gained 4.37% over the past month, compared to a 1.4% increase for the S&P 500 index. Trade exploded, with daily sales exceeding 1,000 billion yuan during many days.

Chinese individual investors take the lion’s share of local stock transactions, unlike most other major markets. In May, an additional 1.41 million individual investors opened new stock trading accounts. That brought the total number of retail investors to 187 million, up 13% from the same period last year, according to statistics compiled by the China Securities Depository and Clearing Corp.

In margin trading, investors borrow money from brokers to buy stocks or borrow stocks directly from brokers to bet. In the 2015 bull market, when the margin trading balance hit a record 2.27 trillion yuan, no more than 10 billion yuan was borrowed in stocks, or less than 1% of total margin trades. In contrast, investors borrowed more stocks this time around, indicating that more of them are bearish in the market. On Thursday, the outstanding amount of borrowed shares reached 152 billion yuan, or nearly 9% of the total trading margin.

The biggest limitations to securities lending are the shortage of available inventory and the high cost, said a senior industry participant. When an investor borrows stocks, the broker can either spend their own money to buy stocks in the market and then lend them to the investor, or borrow stocks from mutual funds or shareholders of listed companies. which requires strong networks and financial strength, a senior broker told Caixin.

Since more than 90% of clients who borrow stocks are high net worth individuals and institutions, brokerage firms typically rely on these clients for their future growth, the senior broker said. As more and more investors borrow stocks, this sector is expected to reach 500 billion yuan in the next three years, the broker estimated.

The top five stocks sold on shares borrowed on Thursday were Shanghai-based brokerage firms Shenwan Hongyuan (000166.SZ), pump manufacturer Zhejiang Leo Group Co. Ltd. (002131.SZ), steel producers Inner Mongolia BaoTou Steel Union Co. Ltd. (600010.SH) and Chongqing Iron & Steel Co. Ltd. (601005.SH), and pig farming Muyuan Foods. Co. Ltd. (002714.SZ).

Top five net stocks bought on borrowed money Thursday were feed producers Tongwei Co. Ltd. (600438.SH), solar power plant operator Sungrow Power Supply Co. Ltd. (300274.SZ), Do-Fluoride Chemicals Co. Ltd. (002407.SZ), vaccine developer Shenzhen Kangtai Biological Products Co. Ltd. (300601.SZ) and brokerage China Industrial Securities Co. Ltd. (601377.SH).

The overall valuation of the A-share market is still within a reasonable range, and there are both overvalued and undervalued stocks, said Ma Wenyu, strategic analyst at Shanxi Securities.

Contact journalist Denise Jia ([email protected]) and editor Bob Simison ([email protected])

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