Regulators move to curb leverage
In response to the spike in activity, regulators implemented tighter margin-financing rules that took effect on Monday. The minimum collateral ratio for new credit purchases has been raised to 100% from 80% across all three exchanges. Investors must now pay the full value of any new share purchase out of pocket, effectively eliminating borrowing for fresh margin trades, although existing margin positions remain subject to earlier rules.
This adjustment targets the primary source of leverage in China’s equity market. Margin financing allows investors to borrow from brokers to amplify positions, a mechanism that can accelerate rallies but also magnify downside risk when sentiment shifts.
U.S. investment bank Morgan Stanley reported that its weighted A-share Market Sentiment Activity Index jumped to 91% in recent days, surpassing the 90% threshold that it classifies as “overheated” for the first time since September 2024. Analysts at the firm linked the elevated reading directly to record turnover levels and described the regulatory response as an effort to temper exuberance.
Retail investors still dominate
Despite steadily rising foreign participation, mainland trading remains driven by domestic retail investors. HSBC data indicate that individual traders account for roughly 90% of daily turnover, a stark contrast to markets such as the New York Stock Exchange, where institutions execute the majority of volume and retail activity typically represents 20%–25%.
Net foreign inflows have exceeded $50 billion over recent months, according to alternative-asset manager Skybound Capital, but the absolute value of that capital remains small relative to the market’s overall size. Analysts at the firm noted that domestic investors continue to set the tone, particularly in fast-moving sectors tied to artificial intelligence and other technology themes.
Selective heat across exchanges
The intensity of the rally has been uneven across China’s equity segments. The ChiNext board in Shenzhen, which houses many growth-oriented technology names, has advanced almost 50% in the past six months. In comparison, the broader Shanghai Composite Index has recorded far more modest gains during the same period. Market observers describe this pattern as “structural overheating,” concentrated in areas where speculative trading is most pronounced.
Memory of 2015 shapes policy stance
The current trading environment has drawn parallels to 2015, when soaring margin debt underpinned sharp price increases before regulators intervened. That cycle culminated in a rapid market contraction that rippled through global financial systems and prompted further regulatory reforms.
Against that backdrop, officials appear determined to engineer what analysts call a “slow bull” — a more orderly, less leveraged advance that avoids destabilizing swings. By hiking collateral ratios at an earlier stage in the cycle, authorities aim to limit the build-up of excessive debt without halting liquidity support entirely.
Some market participants expect additional policy measures if turnover continues to climb. While stricter margin requirements reduce the immediate risk of forced liquidations, they do not address all channels of speculative funding. Observers note that regulators could extend surveillance to financing arrangements outside traditional brokerage accounts should leverage migrate to less transparent venues.
Liquidity backdrop remains supportive
Even with tighter margin rules, analysts anticipate that ample domestic liquidity and supportive monetary conditions will underpin demand for equities through at least the first quarter. Morgan Stanley expects continued policy support for onshore A-shares as well as Chinese listings in Hong Kong.
Global parallels highlight the balancing act authorities face. Margin lending frameworks overseen by bodies such as the International Organization of Securities Commissions generally aim to temper systemic risk while ensuring markets remain functional. China’s latest move follows that broader regulatory logic yet illustrates how domestic retail dominance can accelerate cycles to an extent seldom seen in more institutionally driven markets.
Whether the higher collateral bar will cool trading volumes meaningfully remains uncertain. Early indications suggest turnover has moderated slightly, but market veterans caution that past interventions sometimes offered only temporary relief when underlying enthusiasm stayed intact. Continued monitoring of margin balances and sector-specific flows is expected in the weeks ahead.
Crédito da imagem: Bloomberg via Getty Images
