Some Chinese Are Taking 22% Margin Loans to Finance Stock Purchases

Bloomberg: As more Chinese jumped into the market in the hope of instant wealth, peer-to-peer websites offering loans for stock investing have mushroomed. They are among a multitude of sources of leverage outside of traditional margin financing that threaten to complicate any efforts to prevent an unruly reversal of China’s stock market boom, which is already faltering.

 Chinese brokers have extended 2.1 trillion yuan ($339 billion) of margin finance to investors, double the amount at the start of the year. But this often-cited figure is only part of the mountain of debt taken out to finance share purchases. Another 1.7 trillion yuan may have flowed into stock market investment from wealth management products, online lending sites and other sources, according to a Bloomberg survey of analysts.

“While we can regulate margin finance within a brokerage, for those financing activities which are not within the securities houses, it’s very difficult to regulate,” said Ronald Wan, the chief executive officer of Partners Capital International, an investment bank in Hong Kong.

The perils of debt-fueled trading were underscored in past weeks, as the unwinding of margin loans helped drive China’s benchmark index into a bear market.

Lower Thresholds

Online peer-to-peer, or P2P, lending accounts for just a small part of total leverage, yet it has expanded rapidly and attracted the type of investors who can least afford losses — those that don’t qualify for traditional margin loans.

About 40 online lenders helped arrange more than 7 billion yuan of loans for stock purchases in the first five months of 2015, according to Shanghai-based Yingcan Group, which tracks China’s more than 1,500 such credit providers. Lending volumes surged 44 percent in May from April, Yingcan estimates.

The sites are popular because they allow high levels of leverage, and lack the restrictions brokers impose on margin finance accounts, such as high deposits and limits on the types of stocks against which clients can borrow.

“The threshold for lending on peer-to-peer websites is lower, this suggests that investors who borrow through these sites tend to be weaker financially,” said Shen Meng, a Beijing-based director at Chanson & Co., an investment bank.

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