Shipping containers and gantry cranes beyond a fishing boat near the Yangshan Deepwater Port in Shanghai, China, on Wednesday, Dec. 6, 2023.
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China’s stock market rally is drawing closer regulatory scrutiny after trading activity surged to unprecedented levels, prompting officials to move to curb leverage even as many investors argue the bull run is still in its early stages.
Daily turnover across the Shanghai, Shenzhen and Beijing stock exchanges climbed to successive record highs Monday through Wednesday last week, according to Wind Information, a financial data service focused on China. Trading volume peaked at 3.99 trillion yuan ($556 billion) on Wednesday, surpassing the previous record of 3.48 trillion yuan set in October 2024.
Earlier this year, the benchmark CSI 300 hit a four-year high. This comes after the index posted its best yearly gain since 2020.
The surge has revived memories of past market excesses, particularly the boom-and-bust cycle of 2015, market veterans told CNBC.
China’s regulators have responded by tightening margin financing rules, including raising collateral requirements on new margin trades.
Under the updated rules, which took effect on Monday, the margin requirement for credit purchases was lifted to 100% from 80% across the three bourses. This means that investors must now pay the entire cost of shares upfront, while keeping the trades under existing margin financing rules, effectively eliminating borrowing on new margin trades.
The regulatory tightening suggests an “overheating” of activity and sentiment in onshore markets, said Morgan Stanley, referring to stocks traded in mainland China, or A-shares, in yuan and by domestic and approved foreign investors.
The investment bank’s weighted A-share Market Sentiment Activity Index surged to 91% in recent days, the first reading above the 90% threshold since September 2024, driven largely by the spike in trading volumes.
Recently, the trading volume in the mainland has been exploding to an all-time high. Margin financing has reached a high level as well.
Hao Hong
Grow Investment Group
“Regulatory tightening took place as our sentiment indicator surged to an overheated level with record high turnover,” Morgan Stanley analysts said in a note.
However, they expect added liquidity support for both A-shares and Hong Kong equities to persist through the first quarter.
Foreign investors have stepped up their activity, with net inflows exceeding $50 billion in recent months, a sharp increase from previous years, according to data provided by Skybound Capital.
Still, foreign participation remains small relative to the overall size and turnover of the A-share market. Domestic investors continue to drive the rally, said Theodore Shou, chief investment officer at Skybound Capital.
Retail investors account for about 90% of daily turnover in China’s onshore stock markets, according to data from HSBC. That contrasts sharply with major overseas markets, where institutions dominate trading and retail investors make up only around 20% to 25% of volumes on the New York Stock Exchange.
Engineering a slower bull?
The dominance of onshore capital has shaped regulators’ approach to leverage.
In China’s equity market, leverage primarily comes from margin financing, in which investors borrow from brokers to buy shares, amplifying both gains and losses. When leverage builds in such an environment, rallies can accelerate quickly but are also more vulnerable to abrupt reversals if sentiment shifts.
“Recently, the trading volume in the mainland has been exploding to an all-time high. Margin financing has reached a high level as well,” said Hao Hong, chief economist at Grow Investment Group. “So the regulators have attempted to tweak the leverage so that they could engineer a ‘slow bull’.”
Other market veterans said the latest margin-financing adjustments appear to be calibrated to temper speculative excess and promote this “slow bull” market, rather than signaling concern about systemic risk.
“The situation is better described as ‘structural overheating,’ concentrated in specific sectors such as AI-related and technology stocks, many of which are recent listings that have attracted intense speculative interest.”
Shou also pointed to the growing divergence across China’s exchanges as evidence that enthusiasm remains selective. The ChiNext board has surged nearly 50% over the past six months, far outpacing the more modest gains in the Shanghai Composite Index.
