New York (HedgeCo.Net) – The Shanghai Composite Index (SSEC) has dropped 13.5% in the last five trading sessions and it closed below its 50-day moving average for the first time since February and only the third time in the past year.
Unfortunately things could get worse before they get better for investors in China due to the heavy use of margin. According to a recent Bloomberg article, the 30 stocks in the SSEC with the highest levels of shares purchased on margin are down 17% over the last five trading sessions.
Chinese regulators are aware of the high margin issue and have attempted to curb margin buying in recent months by raising the margin requirements, but it hasn’t been enough to slow down investor enthusiasm. If the losses continue, the problem will take care of itself as investors get margin calls and are forced to sell to meet the margin calls. Unfortunately that could also drive prices down even further if there aren’t enough buyers on the other side of the trades.
According to the Bloomberg article, there is at least $364 billion in borrowed money that is invested in stocks on the Shanghai and Shenzhen exchanges.
Rick Pendergraft
Research Analyst
HedgeCoVest