Chinese brokers curb margin access as leverage drops to 2.6 trillion yuan

Chinese brokerages are tightening compliance requirements on margin financing and derivatives trading after a sharp market pullback exposed the risks of retail leverage.

Chinese brokerages are tightening scrutiny on margin financing and options trading, restricting new account holders and frequent margin-call recipients as total margin balances drop to 2.6 trillion yuan after a sharp market pullback.

"Excessive concentrations of leverage in certain segments has increased the risk of market instability," said Wang Chen, a partner at XuFunds Investment Management Co. "While those risks appear to have eased, they have likely not been fully unwound and will remain a regulatory focus in the coming period."

China's total margin trading balance dropped to 2.6 trillion yuan ($362 billion) at the end of July after topping 3 trillion yuan in late June, according to data compiled by Bloomberg. Investors opened 960,660 new margin trading accounts in the first half of the year — a 60 percent jump from a year earlier. June alone saw 179,021 new accounts opened, up 77 percent year-on-year, highlighting the surge in retail demand for leveraged bets.

The clampdown shows Beijing's growing caution over equity market leverage, where severe retail losses risk spilling over into broader financial and social instability. The benchmark CSI 300 Index retreated after touching its highest level since late 2021 in June, with the ChiNext Index and the STAR 50 Index both tumbling more than 20 percent in July.

Several firms including Citic Securities Co and East Money Information Co have recently raised compliance requirements for clients seeking leverage or derivatives trading, according to people familiar with the matter, who asked not to be identified discussing private matters. The two brokers didn't respond to requests for comment.

The measures include more stringent checks on finances, trading experience and risk tolerance before approving access to margin financing or options accounts. At several brokerages, investors who opened fresh accounts in the past six months or have received frequent margin calls will be restricted from further borrowing.

Retail investors flooded into Chinese stocks during this year's rally, relying heavily on borrowed money to chase gains. But as market volatility spiked, an increasing number of mom-and-pop traders were forced out of their positions in late July, according to brokerage account managers. The forced exits accelerated the market's decline, creating a feedback loop that regulators are now seeking to break.

Brokerage earnings surge on trading boom

The trading boom boosted earnings across the brokerage industry. China International Capital Corp estimates that 42 listed securities firms posted a combined 142.5 billion yuan in net income in the first half, up 50 percent from a year earlier. Citic Securities Co reported a 69.6 percent surge in first-half net income to a record high, while Guotai Junan Securities Co forecast profit growth of 27 percent to 30 percent, with recurring earnings reaching a new first-half peak.

Daily trading volumes in Chinese equities approached 4 trillion yuan in late June before falling below 3 trillion yuan in recent weeks. The surge in margin accounts and trading activity drove the earnings boom, but the tightening measures now threaten to cool that momentum.

Policy focus shifts to market stability

Policymakers are attempting to foster long-term capital market development while weeding out speculative behavior. At a Politburo meeting in late July, top leaders pledged to boost investor confidence and reinforce market resilience.

The tightening comes as authorities focus on highly leveraged trading, which can trigger forced liquidations and accelerate market declines. The CSI 300's retreat from its June peak — the highest since late 2021 — was rattled by regional market turbulence and shifting outlooks for the artificial intelligence sector. Tech-heavy indexes took the brunt of the selloff, with both the ChiNext Index and the STAR 50 Index falling more than 20 percent.

For global investors, the regulatory tightening indicates Beijing remains wary of speculative excess even as it seeks to support long-term capital market development. The reduction in margin availability could dampen short-term trading volumes and add downward pressure on Chinese equities, while the brokerage earnings boom may cool as leverage demand moderates. The next test for the market will be whether the CSI 300 can stabilize above its July lows as regulators continue to unwind the leverage that fueled the rally.

This article is for informational purposes only and does not constitute investment advice.