Lots of noise, some notes that may help. Crackdown on OTC margin financing/umbrella trusts is significant. Jan 19, 2015 saw a 8% slide on the Shanghai Comp and arguably market a little more extended now than it was then. 6 million new A-share trading accounts have been opened in China over the past month i.e. > the entire population of LA.
WHAT HAPPENED TODAY:
1. China allows mutual funds to lend stocks for short-selling, expands number of stocks available for short-selling. The timing is perhaps a little suspect given all the jawboning they’ve been doing (via local brokerages & state-owned media) to keep the fire lit under the A-share market but allowing a two-way market & making it more sophisticated has always been part of the plan. The pilot programme for margin trading & short-selling in China started in 2010 has grown, albeit in fits & starts and in the face of the usual skepticism about China, ever since
2. CSRC crackdown on OTC margin financing esp umbrella trusts – according to a CSRC spokesman they plan to regulate margin trading in 7 respects, the most important of these (& in my opinion *THE* key reason for the sell-off in China equities) is the prohibition of any kinds of OTC margin financing. Sell-off in H-share futures & ETFs is likely to get in front of a slide in A-shares on Monday
3. Over the past week, there has been more on margin financing. Reuters had story earlier in the week on banks been asked to check levels of margin financing. That didn’t flutter the market too much. A clampdown on umbrella trusts though would be a more direct hit. Here’s why -
BACKGROUND: From UBS in February on why crackdown on umbrella trust matters:
Trust sector AUM grows over Rmb1trn QoQ to Rmb14trn
Rapid growth of trust assets under management (AUM) continues to be driven by collective trust products, the actively-managed portion of AUM that is sold as products
to multiple investors. However, the underlying asset mix is shifting away from loan products to a range of alternative asset products, including hybrid products, equity
funds and margin financing products.
Trust companies have potentially become the largest source of margin finance
A key part of the growth in collective trust products came from strong demand for equity market margin financing under a product type known as umbrella trusts. These
products have provided an estimated Rmb1-1.2trn of margin financing to equity markets. However, there were broad-based increases across all AUM categories.
Securities sector AUM also saw rapid growth of 17% HoH to Rmb8trn
The growth of securities AUM is conversely being driven by passively-managed AUM, with securities AUM only generating an average of 16bp per unit of AUM, a fraction of what trust companies generate on their AUM.