China Brokerages Tighten Margin Rules After 3 Trillion Yuan Leverage Peak

Chinese brokerages including Citic Securities Co and East Money Information Co have tightened compliance checks on margin financing, securities lending and options trading, curbing leveraged retail bets after margin balances peaked above 3 trillion yuan in late June.

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

The measures include more stringent checks on finances, trading experience and risk tolerance before approving margin or options accounts, according to people familiar with the matter. 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. 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, Bloomberg-compiled data show. Investors opened 960,660 new margin trading accounts in the first half, a 60% jump from a year earlier, with June alone adding 179,021 accounts, up 77% year-on-year.

The clampdown shows Beijing's growing caution over equity market leverage, where severe retail losses risk spilling into broader financial and social instability. The benchmark CSI 300 Index retreated after touching its highest level since late 2021 in June, rattled by regional turbulence and shifting outlooks for the artificial intelligence sector. Tech-heavy indexes took the brunt of the July selloff, with both the ChiNext Index and the STAR 50 Index tumbling more than 20%.

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. Those forced exits accelerated the decline in margin balances from their late-June peak.

Leverage Boom Lifts Broker Profits to Records

The trading boom lifted earnings across the brokerage industry even as regulators moved to cool speculative behavior. 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% from a year earlier. Citic Securities reported a 69.6% surge in first-half net income to a record high, while Guotai Junan Securities Co forecast profit growth of 27% to 30%, 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.

Deleveraging Path Ahead

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 follows a familiar pattern of regulatory intervention after retail-fueled rallies: the CSI 300's retreat from its highest level since late 2021 shows how quickly leveraged positions unwind when volatility spikes. If leverage keeps draining, daily turnover could stay below the 3 trillion yuan threshold through the third quarter, pressuring brokerage revenue from margin interest and derivatives. If the market stabilizes, the stricter account checks may simply redirect retail flows toward longer-duration holdings.

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