The Chinese stock markets are now worth $10.3 trillion, another big milestone for the emerging economy.
By the end of May, the Shanghai Stock Exchange had a total market capitalization of $5.9 trillion, and the Shenzhen Stock Exchange sat at $4.4 trillion. Combined, the mainland Chinese stock market has a whopping $10.3 trillion valuation, according to a report by the World Federation of Exchanges. (Source: World Federation of Exchanges, Last Accessed June 15, 2015.)
Valuations in Chinese stock markets are at record highs thanks to astonishing growth over the past year. The Shanghai Stock Exchange Composite Index climbed 145% in the past twelve months, while the Shenzhen Stock Exchange Composite Index surged a more astronomical 183%.
The outstanding performance of the Chinese stock market comes with its drawbacks. One of them is the huge pile of margin debt that comes with the buying frenzy. Bloomberg reported that the country currently has a total of $358 billion in margin debt. (Source: Bloomberg, June 15, 2015.)
$358 Billion in Margin Debt
This level of margin debt brings hard-to-control sell-off risks when situations go sour. When the market experiences downturns, traders are usually forced to sell their shares to cover the margin calls.
The crazy surge in the Chinese stock market is not immune to disruptions. On May 28, the Shanghai Composite plunged a staggering 6.5%, while the Shenzhen Composite dropped 5.5%. This was quite a shock to the markets, as the Shanghai index just had a seven-day rally, gaining more than 14%.
Another example happened on Tuesday June 16, where the Shanghai Composite lost 3.47% and the Shenzhen Composite dropped 3.59%.
The volatility in China’s stock markets suggests that the rally over the past year was not on solid footing. High margin debt could also raise concerns from the regulatory authorities. The government is already worried about the buying frenzy over the past year. If tighter rules come into place with regards to margin borrowing and lending, economists believe Chinese equities would be badly hit.