The one thing China (SHCOMP)’s bulls and bears can agree on is that swings in the world’s most-volatile major stock market are only going to get bigger after equity traders took on record amounts of debt.
Both Bank of America Corp. strategist David Cui, who predicts Chinese shares will fall, and JPMorgan Chase & Co.’s Adrian Mowat, who has an overweight rating, say the surge in margin lending to all-time highs is amplifying price fluctuations in the $4.9 trillion market. Volatility in the benchmark Shanghai Composite Index reached the highest level since 2009 this week after rising more than fourfold since July.
While the flood of borrowed money into Chinese stocks added fuel to a 59 percent rally in the Shanghai Composite during the past 12 months, the gauge’s 7.7 percent tumble on Monday illustrates how leverage can also accelerate declines. Margin traders unloaded shares at the fastest pace in 19 months during the rout, which was sparked by regulatory efforts to cool the growth of margin debt in a market where individuals drive 80 percent of equity volumes.