Chinese CSI 300 continues to march higher, so does margin debt

Chinese stock markets continue to ignore the economic weakness, global risk aversion, Greece contagion and warnings by market participants and continuing its march to higher highs.

It has been iterated that rallies remain very vulnerable as the rise is boosted by rise in margin trading in China.

• CSI 300 made to new highs intraday close to 4350, as peoples Bank of China (PBOC) cut reserve requirement ratio (RRR) over the weekend. However index closed down -1.64% to 4217. CSI300 has risen consecutively in past 6 trading weeks. In last 12 months, only in one month prices has closed in red.
  
  
• CSI300 is up 30% so far this year and more than doubled in last 12 months.

Further rise can't be ruled out as PBOC will keep easing policy further this year.

• With IMF review due this year to include Yuan as a reserve currency to include in SDR basket, it is unlikely that policy makers would allow any disorderly drop in China's stock market and with utmost determination will keep Yuan as much stable as possible.

However it would be foolish to ignore the trend of buying stocks in margin.

• As per latest statistics, margin debt in Chinese stock market has reached 1.7 trillion Yuan.
  
  
• Margin debt now contributes about 16% of daily volume in the index.
  
  
• Margin trading balance as percentage of free floating market cap now stands at 8% in China, compared to less than 2% in US, Taiwan, Korea.

Investors should maintain caution over the use of leverage in China.