Official Margin Debt Tops 350 Billion Yuan, Unofficially?

Bloomberg: China's $358 Billion in Margin Loans Points to Next Bear Market

Stock forecasters in search of an early-warning system for the next Chinese bear market are zeroing in on the country’s record $358 billion pile of margin debt.

When that three-year build-up of leveraged positions starts to unwind, regulators will struggle to limit the selloff, according to Bocom International Holdings Co. and Rabobank International. Almost all of this year’s biggest declines in the Shanghai Composite Index, including a 6.5 percent slump on May 28, were sparked by investor concerns over margin-trading restrictions. The securities regulator announced plans Friday to limit the amount brokerages can lend for stock trading.

“There’s definitely a ceiling on margin-lending,” said Wu Kan, a Shanghai-based fund manager at Dragon Life Insurance Co., which oversees about $3.3 billion. “Once leveraged investors begin to cut their holdings, it means they’ve turned cautious on the market and that will probably spark a correction.”

This is only the official margin ceiling, there's much more leverage in the system thanks to lending companies.

The tragic story in Margin Assisted Suicide; Changsha Man Jumps After Losing Everything is only an isolated case because it happened in the middle of a bull market. Mr. Hou of Changsha was very unlucky. He bet everything on one stock, with 4 times leverage, and that happened to be one of the very few stocks to drop limit down for two consecutive days, wiping out all of his capital.

Even though China Tightens Margin Financing Rules and

China Securities Regulatory Commission said investors need to have a minimum daily balance of 500,000 yuan ($80,000) securities assets in the last 20 trading days to take margin loans.

small investors are still going to find credit if they want it, leveraging up with outside credit to hit the minimum balance and then layering margin debt on top of it.

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