China’s A-shares have fallen by 8.2% during the past three sessions as margin buyers reduced position in anticipation of tighter regulation and investors raised cash in advance of IPOs. The cost of margin borrowing on the Shanghai Stock Exchange is highly sensitive to IPO demand. The intraday top of 65% for overnight money last February printed on February 10, the day before the Beijing Sojo Electric IPO, and a week before the Chinese New Year, the peak of seasonal liquidity demand.
Thursday’s intraday high of 6% was tame compared to some earlier numbers, but a China News report that margin lending conditions might tighten prompted levered investors to liquidate positions in large-cap stocks, including rails utilities and insurers. 2.34 trillion yuan in IPO’s from twenty-five companies are in the pipeline between now and May 11.
A report in China Business News cited an official of China Securities Finance, the main lender to brokers, who recommended restrictions on margin lending. Reportedly total margin trading and short-selling would be capped at four times brokers’ net capital, and brokers would be restricted from lending to buy securities from loss-making companies or issuers with extremely high P/E ratios.
The big value play in China remains the Hong Kong market, where the Hang Sheng China Enterprises Index trades at a forward P/E of less than 10, compared to almost 17 for the Shanghai Composite Index.
Asia Unhedged, though, expects A-shares to bounce back and keep rising through 2015. The near-correction in the Shanghai Composite, after all, was engineered by the Chinese authorities, who want a solider foundation for the stock market rally than margin credit. The authorities have also done their best to encourage the IPO wave, as way of deleveraging corporate balance sheets. Less leverage and more supply is usually a negative for stock prices in the short run, but it is a very good development for China’s economy in the medium term. China needs high equity valuations to rebuild the national balance sheet, and these speed bumps will migrate Chinese shares into stronger hands.
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