China Stock Market Crash – Individual Investors, Margin Investors

China’s efforts to rekindle investor enthusiasm for the stock market are gaining little traction as margin traders cash out and new equity-account openings tumble.

Speculators reduced bets using borrowed money to the lowest level in four months on Tuesday, while the number of new stock investors shrank last week to the smallest since the government started releasing figures in May.

Waning interest in equities among China’s 90 million investors underscores the challenge of supporting a market where individuals account for more than 80 percent of trading. The Shanghai Composite Index nearly erased gains from its July 8 low on Tuesday, despite government support measures that include arming a state-run financing agency with more than $480 billion to bolster the market.

At the market’s peak in June, investors were opening more than 1 million accounts a week. Margin debt surged fivefold over the preceding 12 months, propelling the Shanghai Composite to a 150 percent advance.

The outstanding balance of loans backed by share purchases fell by 31.9 billion yuan ($5.1 billion) to 887.5 billion yuan on the Shanghai Stock Exchange Tuesday, the lowest level since March 17. The combined margin debt on Shanghai and Shenzhen bourses has fallen by the equivalent of $136 billion to $230 billion from the June 18 peak through Monday.

Healthier Market

New stock investors totaled 391,500 in the week ended July 24, a 26 percent decline from the previous week, according to data from China Securities Depository and Clearing Corp.’s website. Investors opened 1.64 million accounts in the week ended May 29.

The Shanghai Composite tumbled 29 percent from its June 12 peak through Tuesday, the biggest loss among global benchmark indexes tracked by Bloomberg. Volatility surged to its highest levels since 1996 as the Shanghai measure plunged 8.5 percent on Monday.

Waning interest by new investors may help restore calm to Chinese markets.

The drop in new accounts and outstanding margin loans could actually be healthier for the Chinese stock markets in the longer term, as much of the run-up and subsequent collapse was riding on record number of retail traders and rocketing margin financing.

Selling Pressure

The stock index closed 3.4 percent higher on Wednesday, with all the gains coming in the last hour of trading, as the value of shares traded fell to the lowest level in almost two months.

State intervention won’t be enough to offset the “relentless selling pressure” caused by margin traders unwinding an estimated $600 billion of wagers, once unofficial figures are included.

The risk is that the unwinding of the leverage will be disorderly. Investors could easily panic if they suffer from meaningful capital losses.