So says Macquarie Bank:
Last week’s sharp A-Share correction creates an opportunity for us to update our margin database and charts. It seems that hardly a day has gone by in recent weeks without some discussion of media reports about broker “crackdowns” on Chinese margin lending. But it may be more instructive to observe what brokers and their customers actually do rather than simply observing what the media reports they are doing. This is because the aggregate data on margin lending tells a very different tale from the “tightening” narrative.
Margin positions have continued to spike, climbing 16% MoM and 123% YTD to reach a new high of RMB2.3 trillion as of 18 June. This is 4.6x higher than a year ago. It brings the ratio of margin positions to market cap up to 3.4%, which is still below peak levels achieved in Taiwan in the 1990s. However, as noted previously, margin positions to free float – our preferred metric for considering the possible share overhang – is now 8.5%. Admittedly these numbers become less shocking with time, and cross-country comparisons are fraught with apples to-oranges risks, but we’ll say it one more time – this level of margins to free float is higher than any historical example that we can find.
We think that the peak should be somewhere around RMB3 trillion and at the current run rate (ie +16% MoM) the market would reach that level around September. However, we wouldn’t want to create an appearance of extreme confidence in our own guesstimate of peak margin levels and the timing for when the market will get there.
Meanwhile, from Investing in Chinese Stocks, it ain’t over ’til the guv’ment says so:
Liu Shan asks, what does the government think of the plunge in stock prices?
Regarding the slow bull market, people say the securities regulator is responsible for slowing, the PBOC for bulling. Now the regulators have completed the slow part, but the PBOC hasn’t completed the bull part.
Shan says the PBOC can cut the RRR to boost liquidity. It can also push liquidity into the bond market, where short-term corporate bonds are still trading above long-term loan rates:
As the third phase of short-term bonds June 19 traded Chemical Co., Ltd. Shandong Jade year 2015, the rating A-1, duration of 366 days, annual interest rate of 6%. China National Gold Group Corporation 2015 second tranche of medium-term notes, rated AAA, APR 5.29. Look from the bank lending rates, a five-year lending rate to 5.50 percent, more than five years of 5.65%. Compared the two, the high cost of debt financing, bond financing will inevitably suppress traditional industries initiative.The PBOC can twist too:
In addition, the central bank will take “Operation Twist”, improve short-term financing costs, lower long-term yields. Reduce short-term liquidity supply, causing a leveraged effect in the stock market. Stock market crash, the central bank has reached the desired effect.Now the bank can hike short-term rates and lower long-term rates, creating a bull market in long-term bonds. iFeng: 第77期：股市暴跌政府在想什么
If China’s central bank starts deciding policy based on the stock and bond markets, disaster is guaranteed.
But not before asset prices go much higher, for much longer! The most damaging outcome for the China bull market would be a strong economic rebound. That is not likely.
