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Chinese markets simply did not bulge, and investors seemed to be unconvinced by the regulator’s latest initiative. Or there could be a lot more margin calls than the CSRC let on. The Shanghai Composite closed below the psychological level at 4000.
Chinese investors are very active traders and they hold their positions for an average of only 18 days. Furthermore, they are required to collateralise at least 150% of their margin loans. If the collateral value falls below 130%, they must top up the shortfall or liquidate their stock holdings bought on margin.
In less than three weeks, Chinese equities have fallen over 20%, which may have trigger a considerable number of margin calls. This is why Beijing announced the margin rollover measure.
Meanwhile, traders continue to close out their leveraged positions, either forced or to cut risk exposure. Outstanding volume of margin loans on the Chinese bourses headed south for the eighth day on Wednesday, falling to CNY 2.03 trillion, lowest in five weeks. The recent slump wiped out USD 2.38 trillion of equity capitalisation in three weeks, almost half of Japan’s entire market capitalisation.
The Chinese authorities appeared to have become more sensitive to swings in the stock markets. It remains to be seen what other initiatives they may conjure up to stabilise the market. It’s worth mentioning once again that in my opinion, any measures that tries to shift sentiments will be short-lived.
While Beijing is fine-tuning the whole retail investor framework in the stock market in order to engineer a stable bull market, extremely volatility is here to stay in the short-term. The downward momentum remains very strong, and further corrections are expected in the coming sessions.