China’s stock market overheats amid record high turnover
Containers and gantry cranes are transported beyond a fishing boat near the Yangshan Deep Water Port in Shanghai, China, on Wednesday, Dec. 6, 2023.
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While many investors argue that the bull run is still in its early stages, the rally in the Chinese stock market is drawing regulatory scrutiny closer after trading activity surged to unprecedented levels, prompting authorities to seek to cut leverage.
Daily turnover on the Shanghai, Shenzhen and Beijing stock exchanges hit consecutive record levels from Monday to Wednesday last week, according to Wind Information, a financial data service focused on China. Trade volume reached 3.99 trillion yuan ($556 billion) on Wednesday, surpassing the previous record of 3.48 trillion yuan set in October 2024.
The rise brings back memories of past market excesses, particularly the boom-and-bust cycle of 2015, market veterans told CNBC.
China’s regulators have responded by tightening margin financing rules, including increasing collateral requirements on new credit transactions.
Under the updated rulesWith the decision that came into force on Monday, the margin requirement for loan purchases was increased from 80% to 100% in three exchanges. This means investors must now pay the full cost of the shares up front, while also keeping trades in line with existing margin financing rules, effectively eliminating borrowing on new margin trades.
The tightening of regulations signals an “overheating” of activity and sentiment in onshore markets, Morgan Stanley said, referring to stocks, or Type A shares, traded in yuan and by domestic and approved foreign investors in mainland China.
The investment bank’s weighted A-share Market Sentiment Activity Index rose to 91% in recent days, the first reading to rise above the 90% threshold since September 2024, largely due to an increase in trading volumes.
“Regulatory tightening occurred as our sentiment gauge rose to an overheated level with record-high turnover,” Morgan Stanley analysts said in a note. he said.
However, they expect additional liquidity support for both A shares and Hong Kong shares to continue in the first quarter.
Foreign investors have stepped up their activity, with net inflows exceeding $50 billion in recent months, a sharp increase from previous years, according to data provided by Skybound Capital.
Still, foreign participation remains small relative to the overall size and turnover of the Class A share market. Skybound Capital chief investment officer Theodore Shou said domestic investors continue to drive the rise.
Retail investors account for nearly 90% of daily turnover on China’s black markets, according to data from HSBC. This is in sharp contrast to major overseas markets, where institutions dominate trading and retail investors account for only 20% to 25% of volumes on the New York Stock Exchange.
Designing a slower bull?
The dominance of terrestrial capital has shaped regulators’ approach to leverage.
Leverage in China’s stock market comes mainly from margin financing, where investors leverage both gains and losses by borrowing money from brokers to buy shares. When leverage builds in such an environment, rallies can accelerate quickly but are also more vulnerable to sudden reversals should sentiment change.
“Recently, the trading volume in the mainland has reached an all-time high. Margin financing has also reached a high level,” said Hao Hong, chief economist at Grow Investment Group. “So the regulators tried to change the leverage to create a ‘slow bull’.”
Market experts said the latest margin financing adjustments appeared to be geared to tame speculative excess and encourage this “slow bull” market, rather than signaling concerns about systemic risk.
“It would be more accurate to describe this situation as ‘structural overheating’; it is concentrated in certain sectors such as AI-related and technology stocks, many of which are recent listings attracting intense speculative interest.”
Shou also pointed to increasing divergence among China’s stock markets as evidence that interest remains selective. ChiNext’s board is up nearly 50% in the past six months, far outpacing more modest gains in the Shanghai Composite Index.
