While regulated (and reported) margin trading has fallen substantially from its peaks back in June it is important to realise that the level of gearing of this indication is capped at just 2X. This is not therefore a fair reflection of the true levels of leverage nor reflective of the riskiest portions of that leverage.
By far the greatest levels of leverage in the Chinese market are expressed through the CSI futures market in which leverage in excess of 10X can be quite normal.
Assessing the open interest on the CSI futures index is therefore of significant importance and currently implies that the amount of leverage in the market is now at levels last seen in 2013 (well before the recent rally)
Aggregate open interest in futures market (leverage >10X) is now at levels last seen in 2013 (pre rally).
Furthermore, when we consider the open interest in futures as a proportion of the futures price, it implies that the riskiest and most highly geared portions of leverage in the system had peaked (as a proportion of market cap) BEFORE the rally even began. Although these highly geared positions certainly benefited from the initial stages of the SHCOMP rally, the rally was not in itself driven by an increase in the levels of this form of gearing in the first instance.
The most highly levered positions peaked as a proportion of market cap well before the rally began.
The SHCOMP has now significantly de-risked in our opinion, leaving room for further simulative policy that will help to underwrite the financial reform agenda.
