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Shanghai Surprise! The Shanghai Stock Composite Rallies Over 3000

Shawn Baldwin, Chairman AIA Group at the Shanghai Stock Exchange

Photo courtesy of Shawn Baldwin

(Shanghai, China) Investors awoke to a welcome surprise as stocks surged in China Monday after senior officials signaled that it would be easier for investors use margin to borrow securities—a practice that took off last year and ultimately led to a bubble in the market.

Consequently, the Shanghai Composite Index (SHCOMP) closed up 2.2% at 3018.80, while the Shenzhen Composite Index finished up 2.7% at 1886.37

A jump in brokerage stocks was a strong factor in driving the volatile index to over the 3000 mark for the first time since January. Of particular note, were the shares of Citic Securities Co. Ltd.— China’s biggest broker, which was up by the 10% daily limit allowed by authorities, along with other firms such as Dongxing Securities Co.

The increases were the direct result of a statement made by a state-backed company called China Securities Finance Corporation (CSF), which published new interest rates on a range of loans that it gives to brokerages. The lender provides capital to brokerages so they can lend cash to investors to buy shares of Chinese publicly traded firms. The loans can be held for up to 180 days, the CSF also reduced the rate to 3% from 4.8%. The leverage and rate reduction will bolster the market and will undoubtedly inspire confidence amongst investors.

The leverage was a key factor in the stock market crash last year, as the unwinding of the margin loans used for stock investing caused the market to plummet. In 2015, the margin loans reached over 2 trillion yuan, so as they were recalled the market recoiled. However, although the amount of margin loans has been reduced this year, the Shanghai stock market has been steadily rebounding—it is up 12% since beginning of the month and on a multi-session winning streak.

There is a tremendous opportunity for more upside in the Shanghai Composite Index since it remains 42% off of its peak last June. Margin loans are currently at 847.4 billion yuan as of last Friday, more than half of what they were during the rally. An increase in that margin in combination with the government crackdown on shorting by foreign investors could lead to dynamic market growth. Given these factors in tandem with an explosive IPO market —there may be dynamic upside in the Chinese Stock market in the very near term.

Another factor to bear in mind is that China is still the fastest growing economy in the world.

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