China’s securities regulator issued its strongest warning yet about the country’s soaring stock markets and tightened rules on margin lending while the country’s two stock exchanges said they would make it easier to bet against stocks, spurring worries that the world’s best-performing markets could tumble.

The announcements late Friday by the China Securities Regulatory Commission, the Shanghai and Shenzhen stock exchanges and two industry associations raised fears of a selloff in China, where the main market has now doubled in the past 12 months and the riskiest index is up 70% this year.

A selloff in China could affect markets around the world, analysts said. “If China is down 5% it’s going to weigh on global sentiment,” said David Welch, head of equity distribution at brokerage firm Reorient.

The CSRC warned small investors, who have been big drivers of the rally, not borrow money or sell property to buy stocks, ratcheting up its rhetoric about the market. Mainland investors opened stock-trading accounts at the fastest pace ever in the week ended April 10 and margin account balances stood at a record 1.16 trillion yuan ($190 billion) as of April 16, according to the Shanghai Stock Exchange.

The regulator banned a type of financing called umbrella trusts that provided cash for margin trading and placed limits on margin trading for highly risky small stocks that trade over the counter, rather than on exchanges.

The regulator said customer accounts needed to be better classified, potentially a warning that limits will be placed on the type of trading permitted for small investors.

David Fuller's view

Here is a PDF of the article.

This was the clearest and most detailed of the articles that I have seen on the subject since the China Securities Regulatory Commission statement appeared following the close of China’s stock markets this Friday.  Futures contracts for the indices, some of which trade around the clock, reacted by about 5%. 

Obviously investors will be pondering the implications of this move over the weekend.  My impression is that it is designed to rein in primarily excessive speculation in mainland China’s markets, not least the thinly-traded over-the-counter shares favoured by small investors.  The CSRC also expanded the supply of shares available for short sellers.

Inevitably, all Chinese futures contracts for share indices were hit sharply.  For instance, the Hong Kong Hang Seng (H-Shares) Enterprise Index contract for April, in which I have positions, fell from a high of 14561 before the CSRC announcement to a low of 13856, before closing at 14060.3 for the bid price on IG Index.  While obviously a big move it seems to have been reasonably orderly, judging from an in-the-money stop that I had placed at 14200, to protect the most expensive third of my overall position in the April contract.  It was triggered at that price and I repurchased it at 14039.3 this afternoon because the valuations are still cheap (see below). 

It has been a bit of a ‘perfect storm’ Friday for global stock markets, with Europe wobbling on ‘Grexit’ fears and Wall Street joining the slide when a report indicated that the embers of inflation were still alight.  It will probably be a nervous weekend and Monday.  Expect some bearish interviews and comments but judging from the VIX Index which has barely moved, this may be little more than another short-term nervous reaction. 

(See also China’s Smart Money Is Riding the Stock Boom as Amateurs Rush In)

Please note: Eoin should be back from China on Monday but I will be at The Markets Now seminar.