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HIGH STAKES GAME

Beijing is preparing to double down on China’s expensive, ineffective stock market stimulus

Heather Timmons
By Heather Timmons

White House correspondent

Despite Beijing’s introduction of over $1 trillion in financial stimulus designed to keep China’s stock markets aloft, the key Shanghai index is down nearly 40% from its June 12 peak, and it dropped 20% in five days of trading this month alone. In fact, the stimulus itself may have had the opposite effect, spooking investors and pushing them to front-run the markets, selling out of stocks as they rose so they don’t get caught when the stimulus dries up.

But apparently that’s not stopping Beijing from getting involved. China Securities Finance Corp. (CSFC), the state-run agency that provides capital for margin lending (or loans for stock purchases) to China’s securities firms, is speaking with several banks about raising as much as 1.4 trillion yuan ($219 billion) in inter-bank loans, Caixin reports (link in Chinese), citing unnamed bankers. Bankers told Caixin they’re not worried that such lending could be risky, because CSFC is government-backed—”It’s impossible for them to not pay back money,” one unnamed executive said. 

Margin lending has been drying up as China’s markets have fallen. Chinese investors unwound $31 billion of leveraged loans linked to stock in the past week, illustrating what Reuters called their “rapidly shrinking risk appetite.” If investors continue to unwind these margin loans, China’s markets could face “persistent selling pressure,” Reuters explains.

This week’s margin downturn is on top of the 1 trillion yuan ($156 billion) in margin loans investors have unwound since the market’s June peak, as Bloomberg reported this week. China’s margin lending and stock performance are closely correlated, as Quartz has reported before, and these loans helped inflate stocks far beyond recent historical price-to-earnings ratios, even as China’s economy overall was slowing.

That’s where the new stimulus measure will presumably come in: as cash flows through CSFC into securities companies, which in turn pass it along to investors. Whether China’s retail investors, many of whom have been  badly burned by the markets’ drop, will want to jump back in using risky margin loans is unclear. But Beijing appears to be trying its best to entice them back.

Zheping Huang contributed reporting.

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