2015-06-23

Regulators Can't Stop Outside Margin Financing

In Official Margin Debt Tops 350 Billion Yuan, Unofficially? and Margin Assisted Suicide; Changsha Man Jumps After Losing Everything, I looked at the impact of outside financing on the stock market. Chinese regulators can control broker finance, but there's a huge world of unregulated or gray market finance that avoids strict capital market rules.

Yu Fenghui looks at the issue in 股票场外配资活动很难禁止 (Difficult to Ban Outside Financing)
Brokerage cut both interfaces, it is difficult to prevent financing stocks with the crazy development of a highly leveraged financing business. P2P online and private funds can reach an agreement with investors, to realize their own account or the risk management and control positions.

Therefore, with the development of P2P platforms and the rise of private finance lending practices, relying solely on brokerage transaction interface to limit cutting off business with the capital, the effect is very limited. Moreover, as the interest rates continue to decrease, there has been a massive flow of capital out of deposits and into social financing, including through high leverage into the stock market is one of the channels.

From the current perspective, there's no effective way to block highly leveraged financing of stocks. Regulatory authorities need to constantly attempt explain the risk to highly leveraged investors, enlighten them with reason, and emotionally moving appeals once the stock market crash, for it brings with it the risk of bloody liquidation. The Changha suicide case suffered from highly leveraged positions, his suicide should be a lesson.

1 comment:

  1. Any insights into what caused the whipsaw reflation in today's Shanghai market? It was down 2.5% at lunch and then was up just a few minutes afterwards - new easing news released or Chinese plunge protection team stepping in?

    When I checked at noon there were ~2300 stocks down on the day and the remaining ~400 up. I cannot imagine that a millions of farmers, within a few minutes, decided that this was now the proper time to buy the dips.

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