Are Too Many Chinese Buying on Margin?

July
13

Written by: Jon McGraw

It’s a cautionary tale …

Many Chinese investors were so optimistic about the prospects for Chinese stock markets they bought on margin, meaning they borrowed money to buy stocks. Borrowing to invest has been so popular that the amount of margin loans doubled in just six months to about $320 billion, according to Barron’s. Experts cited in the article said, “… margin financing in China is equal in size to Indonesia’s entire stock market valuation and as high a portion as it has been in any market at any time …”

The problem with buying on margin is repaying the loan if stocks move in the wrong direction. Since the middle of June, Chinese stock markets have lost more than $3 trillion, reported CNN.com. Barron’s explained how margin works:

“In China, a typical investor can borrow $1.25 for every dollar of cash she has, giving her what China calls a ‘guarantee ratio’ of 180 percent, or $2.25 (cash and stock bought on margin) divided by $1.25 (loan value). But, as her stock loses value, the guarantee ratio also falls. At 150 percent, the broker will start to issue margin calls. When the ratio hits 130 percent, the brokerage will force the liquidation of the position to meet the loan.”

About 80 percent of the investors in China’s markets live in China. Many have suffered significant losses as markets have moved lower.

The BBC reported China’s market regulator responded to the market downturn by making it even easier for people to borrow money to invest. Apparently, the hope is small investors will put more money in stocks. Regulators also banned investors who hold 5 percent or more of a company’s stock from selling their shares for six months.

By the middle of last week, Chinese markets had stopped losing value. Only time will tell whether they have truly stabilized.

Closer to home, the New York Stock Exchange (NYSE) suffered a computer glitch that halted trading for several hours last week. The NYSE tweeted, “The issue we are experiencing is an internal technical issue and is not the result of a cyber-breach.”

Data as of 7/10/15 1-Week Y-T-D 1-Year 3-Year 5-Year 10-Year
Standard & Poor’s 500 (Domestic Stocks) 0.0% 0.9% 5.7% 15.7% 14.0% 5.5%
Dow Jones Global ex-U.S. -1.5 2.2 -6.7 7.5 4.3 3.0
10-year Treasury Note (Yield Only) 2.4 NA 2.5 1.5 3.1 4.1
Gold (per ounce) -0.7 -3.3 -13.5 -10.1 -0.8 10.6
Bloomberg Commodity Index -2.5 -4.8 -24.3 -10.3 -4.6 -4.5
DJ Equity All REIT Total Return Index 1.8 -2.3 6.8 10.1 14.2 6.9

Big Data Is Making the News

A well-known search engine company has introduced a cloud-based big data service and a news laboratory that provides data about trends to journalists. During 2014 and 2015, it provided:

  • The Economist with information about the employers and industry sectors that were most popular with American job seekers.
  • Time with five of the top trending people and topics for 2014: Ebola, the Ice Bucket Challenge, Ferguson (Missouri), Vladimir Putin and Dilma Rousseff.
  • The New York Times with a state-by-state assessment of popular Thanksgiving foods. In California they liked persimmon bread; in Texas it was sopapilla cheesecake; in Minnesota they were searching for wild rice casserole; and in New York the favorite was stuffed artichokes.
  • The Washington Post with data on depression, pain, anxiety, stress and fatigue so it could create a daily misery index for the year.
  • Buzzfeed and Vocativ with British and American political data, including the most searched candidate names and questions most frequently asked of candidates.

The search engine also tracks what we don’t know or can’t remember. For instance, it has created a cocktail tool to provide instructions for making the drinks most frequently sought in online searches and a nutrition comparison tool to facilitate food smackdowns (mashed potatoes beat sweet potatoes for sugar, but sweet potatoes win when it comes to Vitamin A, potassium and calcium).

Always remember: When you go online and use certain search engines, your data is being stored and sorted. It’s important to know.

Weekly Fun—Think About It

“We think too small, like the frog at the bottom of the well. He thinks the sky is only as big as the top of the well. If he surfaced, he would have an entirely different view.”

—Mao Zedong, Former Chairman of the Communist Party of China