Who Slayed the Super Bull? China to Investigate Margin Trading after Stocks Slump

The inspections would be presented as a routine check ups of margin trading and its level of compliance with regulations,

The Shanghai Stock Exchange Composite (SHCOMP) fell 0.49% today to 2,925.75, although trading was less volatile than most days recently. The index dropped 5.4% on Tuesday and climbed back 2.9% Wednesday.

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The slump on Tuesday served as a wake up to Chinese regulators to get back in control of the situation after the stock index skyrocketed by about 40% from the start of the year. The amazing rise led to a buying frenzy as retail investors borrowed funds to get in on the action. Talks of an unstoppable “Super Bull” market in the press fanned the flames while fears of a Chinese economic bubble exploding were increasing in the financial world.

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Today the Chinese securities regulator is making it known through unofficial channels that it is going to inspect the $150 billion margin trading and short-selling business. The China Securities Regulatory Commission (CSRC) will send inspection teams next week to check whether the higher-risk offerings comply with regulations, three brokerage sources told Reuters.

“We have already been informed and from the start of next week, the regulator will not only probe our margin trading and short selling businesses but also other financing services such as collateral-backed lending,” one Shanghai-based broker is quoted saying.

The inspections would be presented as regular, checking whether margin trading services comply with procedural regulations, such as whether clients met the criteria to open an account. However, the Chinese brokers expect the probes to be part of a wider clean-up of the margin trading business.

Shanghai Composite Index Daily Chart
Shanghai Composite Index Daily Chart
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