Experts say return of margin traders a boost but risky

Margin traders are making a comeback in the Chinese stock market, prompting analysts to warn about a new "bubble" despite last summer's turmoil.

In less than two months, the value of outstanding margin loans at the Shanghai and Shenzhen stock exchanges increased rapidly by more than 20 percent, with total value exceeding 1.16 trillion yuan ($183 billion) as of Nov 12, the highest level since September.

The surge in margin trading, which describes stock buying through borrowed money from securities firms, is considered a sign of recovering market sentiment. Money has been flowing back to China's battered stock market after the benchmark Shanghai Composite Index rebounded by more than 20 percent from its August low.

The margin requirements will be raised to 100 percent from 50 percent starting on Nov 23, the Shanghai and Shenzhen bourses said in statements on Friday.

Already the market regulator's decision to resume initial public offerings, or IPOs, which were temporarily halted during the June crash, has boosted the market.

It was widely interpreted by investors as growing confidence among the authorities that the country's stock market has stabilized.

But Jiang Yiming, vice-president of Guotai Junan Securities Co, warned that the rapid and excessive expansion in margin loans could bring risks to the market. The current leverage ratio of margin trading, too, has been a cause for alarm.

Several securities brokerages have eased collateral rules for margin traders to take advantage of the return of the bullish sentiment and investors' growing appetite for risks.

Leveraged trading that uses borrowed money helped fuel a spectacular bull run in the first half of this year.

Margin loans reached a record level of nearly 2.4 trillion yuan when the benchmark Shanghai Composite Index surged over the 5,000 points mark in mid June. But when the bubble burst in mid-June, the unwinding of those leveraged bets exacerbated the selling pressure in the market, which suffered a dramatic slide .

"Margin trading is a double-edged sword. It can help create a market rebound but it can also amplify the losses," said Jiang, quoted by the official securities newspaper China Securities Journal in a recent interview.

The possibility of a recurrence of the risk bubble is especially high in the small-cap stocks with excessively high valuations chased by speculative margin traders, analysts said.

Aggressive funds have been chasing small-cap stocks in the information technology, media, health, and new energy sectors, which were already considered too expensive by cautious traders.

While the market consensus is that the latest rally will likely continue, some analysts have warned about the correction risk.