Margin trading has risen to a three-month record in mainland China, as traders borrowed more funds from brokerages to finance their transactions and ride a rally in raw material stocks, such as aluminium producers and steelmakers.
The outstanding amount of the leverage buying on the Shanghai and Shenzhen stock exchanges rose to 908.2 billion yuan (US$136.2 billion) on Wednesday, the highest level since May 4, according to data compiled by Bloomberg.
Local traders have been increasing their holdings of commodity stocks with borrowed money, with Bengang Steel Plates and Shandong Nanshan Aluminium among their top investments, according to Guangzheng Heng Seng, the securities consulting firm jointly formed by Guangzhou Securities and Hang Seng Bank.
A gauge of raw material stocks has emerged as the best performer among the 10 industry groups tracked by the CSI 300 Index over the past two month, delivering a gain of 31 per cent through Tuesday, as President Xi Jinping's so-called supply-side reform of eliminating outdated capacity has closed small coal mines and smelters, leading to a jump in prices from aluminium to coal and steel.
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Aluminium prices rose to a five-year high in Shanghai, while steel rebar futures contracts climbed to their highest in five years, and coking coal used to make steel traded near the highest level this year on the Dalian commodity exchange.
Rising commodity prices have fuelled gains in related stocks. Shares of Aluminum Corp of China, or Chalco, which is the nation's biggest producer of the metal, surged more than 70 per cent in Shanghai over the past two months as Shandong, China's biggest aluminium producing province, plans to cut output by at least 30 per cent to reduce pollution.
Bengang Steel has gained 43 per cent in the period and Shanxi Xishan Coal & Electricity Power rose 51 per cent.
A gauge tracking 33 mainland-listed brokerages by Great Wisdom climbed to a five-month high this month on optimism that increased margin trading will increase market turnover and bolster profits. The biggest brokers are worth investing in, because their valuations are close to their historical lows on price-to-booj valuation basis, according to recommendations by Orient Securities and North East Securities.
Citic Securities, the nation's biggest publicly trade brokerage, trades at 1.4 times its book value, compared with the record low for the multiple of 1.2 times seen in 2015, according to Bloomberg data.
Still, the balance of margin debts remains 60 per cent down from its all-time high registered in 2015 after the stock bubble burst and the securities regulator reined in explosive growth in leverage buying.
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