China´s stock traders have been lending money massively to buy more shares called margin finance. The recent drop on the stock markets has taught them a lesson and WSJ wealth editor Wei Gu sees how Monday´s upswing was caused by margin sellers, cutting their losses, she writes in Dow Jones.
The amount of margin financing outstanding, or the money borrowed from securities firms, has fallen for an unprecedented 13 consecutive days, according to the stock exchanges.
While margin lending, which rose roughly fivefold over the past year, was blamed for a big part of the market’s decline, the government didn’t stop investors from borrowing more money to buy stock, hoping it would send shares higher. Regulators made it easier for investors to borrow and made cash available to brokers to expand margin lending.
Still, investors nursing big losses were in no mood to borrow money to buy stocks.
More deleveraging is happening through unofficial channels. During the market boom, a total of two trillion yuan was borrowed from banks, trust companies and Internet financing sources, according to China Everbright Securities. Now, some of the lenders have been scaling back. Banks and trust companies are forcing borrowers to liquidate positions to protect their lending.
Peer-to-peer lending platforms, which match individual lenders with borrowers, flourished earlier this year by allowing small investors to use big leverage.
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