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Calling time on China’s credit and stock market party

First published:, 5/07/2015

Debt growth has fallen but is still rising at twice the rate of nominal GDP

Last week the Shanghai Composite index dropped by 12 per cent, bringing the fall since its June peak to almost 30 per cent. The decline — which was not prompted by any major news — was accompanied by a rush of volatility, yet both were largely overshadowed by European developments. But is it time to pay more attention?

The doubling in China’s equity market since June 2014 has been not so much a market phenomenon as the Communist party’s party. Facing a protracted economic slowdown, rising debt and credit misallocation, the government has sought to give the economy an asset price boost, partly to encourage indebted state owned enterprises (SOEs) to trade expensive loans for equity financing. This equity boom has been fuelled by leverage, in the form of an explosion in margin debt, where investors borrow to finance a set proportion of equity purchases. Margin debt outstanding has grown sevenfold since the start of 2014 and June to stand at Rmb1.4tn ($225bn)…Read more: