'High leverage, low thresholds!' the website says. "(China's) A shares are heating up; if you don't allocate capital now, then when?" Many, it appears, are choosing now, gorging on cheap credit to ride a wild stock market rally. The website, Jinfuzi.com, will let investors borrow up to 10 times their principal with only 2,000 yuan ($323) down in order to buy stocks and futures.
The peer-to-peer lender has an easy sell; Chinese benchmark indexes have posted record-smashing trading volumes in recent weeks, with average share values up over 30 percent in just 12 trading days. Ordinary investors, who conduct 60-80 percent of China's stock trades, charged into the market after a surprise interest rate cut by Beijing on November 21, and brokerages and shadow bankers have rushed in to help them trade on margin - essentially borrowed money.
"Margin trading has clearly played a big role in the recent rally, and government is worried," wrote Oliver Barron of NSBO in a research note on Tuesday, estimating that gross margin trading purchases accounted for 164 billion yuan ($26.5 billion) on Monday, the equivalent of 17 percent of total turnover on Chinese bourses. There has been a steady relaxation of restrictions on margin trading in the last two years, and while in good times it allows investors to make a lot of money with only a small amount of their own cash, it also carries big risks when the market falls. Some might already be regretting taking those risks after the Shanghai Composite Index lost over 5 percent on Tuesday, its largest single-day drop in five years.
Especially those who might have pledged their property to get in on the rally and offset the slide in house prices. "We provide our customers with service to borrow money with their property as collateral," said Mr Yu, president of Qianteng Asset Management Company in Hangzhou. "We have plenty of funds on hand, which makes it easy for our customers to get money ASAP once they sign the contract." Yu declined to say how his company assesses the chances of borrower default.
Analysts worry that China's financial industry generally lacks rigour in risk assessment and due diligence. In a volatile market, it is much easier for small investors to get caught out. "The swings in the market are up 1, 2 percent, down 3, 4 percent; it's chaos," said Thomas Gatley, analyst at Gavekal Dragonomics in Beijing, who believes the leveraging was at least partly to blame for the increased volatility. The stock market rally is nevertheless welcome in many quarters. Certainly to listed companies, and the many queuing to list, but probably also to Beijing, which is grappling with a slowing economy and fears the housing slide could further dent consumer sentiment.
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