Chinese brokerages tighten client scrutiny to curb excessive risk

Chinese brokerages are implementing stricter oversight of new accounts and increasing scrutiny of activities such as margin financing, securities lending, and options trading. This move comes in response to a sharp market decline, as regulators aim to mitigate excessive risk that could lead to broader financial and social instability.

Major brokerages, including Citic Securities Co and East Money Information Co, have introduced more rigorous checks on clients' financial status, trading experience, and risk tolerance before granting access to margin financing or options accounts. Investors who opened accounts within the past six months or have frequently faced margin calls may now be barred from further borrowing.

This tightening of regulations highlights Beijing's heightened caution towards equity market leverage, which can result in forced liquidations and accelerate market downturns. Despite recent easing of market risks, regulators remain focused on addressing concentrations of leverage in certain segments to ensure market stability. The surge in retail investors, who heavily relied on borrowed funds during the market rally, intensified the volatility, leading to a significant number of forced exits by individual traders in late July.

Margin trading balances in China dropped to 2.6 trillion yuan by the end of July, down from a peak of 3 trillion yuan in late June. Investor enthusiasm for leveraged bets reached new heights, with 960,660 new margin trading accounts opened in the first half of the year, marking a 60% increase compared to the previous year. The boom in trading activities not only benefited brokerage firms, with China International Capital Corp reporting a 50% increase in net income for securities firms in the first half, but also contributed to a retreat in the benchmark CSI 300 Index following its recent peak.