Trading Chinese Stocks on Margin By www.ProfitableTradingTips.com The benchmark Shanghai Composite index had
its worst day yesterday since the market crash that ushered in the Great Recession. The Shanghai
market has had an impressive run up in the last half year outdistancing the S&P 500.
It turns out, however, that many traders with very little capital have been trading Chinese
stocks on margin. The chickens came home to roost yesterday when securities regulators
penalized three major brokers for allowing traders with insufficient capital to trade
on margin. The result was an impressive drop of over more than 7 percent in Chinese stock
market. CNBC covers the story. Chinese stocks plunged Monday after the country’s
securities regulator rapped three major brokerages for continuing to lend money for stock purchases
in violation of rules. As punishment for extending so called “margin trading” contracts, the
brokerages are forbidden to offer credit to new customers for three months. At one point Monday, the Shanghai Composite
Index was down 8.3 percent. It later trimmed that to a loss of 7.7 percent. Share prices
of brokerages were hardest hit, with some falling by the daily loss limit of 10 percent.
Despite the sharp fall, the Shanghai Composite Index is still up 55 percent in the past 12
months and up 33 percent for the past three months. Investors and analysts see the penalties against
the brokerages as foreshadowing more curbs on credit-financed trading by China’s government.
Authorities want to stop the stock market’s boom over the past year from turning into
a bubble that could damage the broader economy. The Chinese market has benefited from a lot
of new investors recently as speculators are pulling their money out of the collapsing
real estate market. The risk that the government sees is another asset bubble ready to burst
and it is taking steps to cool off the market. Situation Currently Limited to China According to The Guardian markets outside
of China are little affected by enforced limits for trading Chinese stocks on margin and the
resulting stock market fall in Shanghai. Despite the slump on the Chinese stock market
– driven by efforts to clamp down on the margin trading which has driven shares sharply higher
– European investors were in a positive mood ahead of the European Central Bank meeting
on Thursday. There is some concern as the Greeks go to the polls next week, but for
the moment the prospect of some form of quantitative easing from the ECB is pushing markets higher.
Banks in particular were in demand, as the FTSEurofirst hit a seven year high. The Eurozone has its own problems but one
of them is not the lack of transparency that threatens investors in China. The other issue
is that there are strict limits to how much foreigners can invest in Chinese markets.
If you want to trade Chinese stocks it is a lot easier to buy or sell American Depository
Receipts. Ready for a Correction The Shanghai market was probably ready for
a correction and the penalties for brokerages having low asset traders trading Chinese stocks
on margin may simply have been an excuse for many to take profits in and get out of an
overheated market. The Wall Street Journal notes that response to the the trading crackdown
was related to investor concerns that the market would fall. Shanghai stocks plunged to their lowest level
in more than six years Monday as investors worried that Beijing’s move to clamp down
on margin trading could derail the benchmark index’s months-long winning streak. In short it was a self-fulfilling prophecy.
Traders were looking for a hint that the market would correct and apparently started to sell
at the first news of the crackdown. Then traders with insufficient collateral to cover margin
calls saw their accounts disappear and the downward rush was on. For more insights and useful information about
trading stocks, options, futures or Forex, visit www.ProfitableTradingTips.com.