Shadow margin loans make a sly return as China stocks sizzle

March 22, 2019

By Shu Zhang and Samuel Shen

SINGAPORE/SHANGHAI (Reuters) – On a cloudy March morning in Shanghai’s glitzy financial district of Lujiazui, Ye Lixia was knocking on the doors of potential clients, offering loans to bet on a surging stock market.

“We provide money to investors who need quick funding to capitalize on the market rally,” Ye told Reuters.

Ye, in her 30s and a general director at Bo Ying Asset Management, is one of the thousands of gray market lenders operating in the shadows of China’s colossal capital markets.

A stock market that shot up 25 percent in the last three months has revived the undercover margin lending business that was notoriously responsible for China’s 2015 boom-bust market volatility.

In defiance of warnings from the China Securities Regulatory Commission (CSRC), shadow lenders pitch their business via cold telephone calls and social media advertisements, dangling the prospects of a reversal of fortune.

“In China, speculators adopt very aggressive trading strategies, gaming the rules… and pushing policy-makers’ tolerance to the limit,” said Stephen Huang, vice president of Shanghai See Truth Investment Management Co.

The Shanghai index’s swift recovery from last year’s heavy losses has been primarily driven by signs of an end to the long-running Sino-U.S. trade war.

Beijing’s efforts to lower the cost of lending in a slowing economy, and foreign investment inflows after the inclusion of Chinese A-shares in global equity benchmarks encouraged the rally.

Shenzhen’s start-up board ChiNext, traditionally a hotbed for speculation, has surged more than 30 percent this year.

In the official margin financing market, in which stock investors borrow money from brokerages, outstanding loans have jumped nearly 30 percent since the end of January to 911.6 billion yuan ($136.08 billion). That is just a third of the 2.27 trillion yuan record hit in June 2015.

But unofficial margin financing, in which small investors borrow from grey market lenders, is thriving.

Hui Ju Ying, a margin lending platform, lures clients with suggestions of “returns of 100 percent.” Another platform,, says: “young people shouldn’t resign to mediocrity; margin financing can change your fate.”

The CSRC said in late February that it was closely monitoring the situation. But regulators have so far taken a soft approach towards such lending.

“Last year, the government was talking about reducing leverage. Now, the government is talking about steadying leverage, which is good for us,” said Ye, whose company borrows money from banks and lends it to investors.


Managers at five margin lenders said they began aggressively marketing loans over the past few weeks to investors eager to make outsized stock market bets.

Such lending helped the Shanghai stock index double between 2014 and mid-2015, forcing the authorities to crack down on shadow lending and causing a 40 percent decline in stocks over six months.

Some of the lenders this time around are newcomers. Others are survivors of the last crackdown, emboldened by the belief that regulators, focused on enabling funding for struggling private firms, will look the other way.

“The loans we make are deals between us and investors and are none of brokerages’ business,” said Xiao Xiao, a saleswoman at shadow financing platform

The financing has been a boon to risk takers like Zhang, who more than doubled his investment capital via shadow margin loans through leveraged bets on 5G-related China tech stocks.

With 50,000 yuan in hand, Zhang, who was willing to disclose only his family name, borrowed 500,000 yuan from a gray-market lender named Gu Zhang Gui six months ago. He has earned 56,000 yuan in net returns so far, he told Reuters.

Zhang pays a daily interest rate of 0.06 percent, which translates to an annualized cost of funding of 22 to 24 percent.

“Stocks are rallying so we investors are making money. And then we want to make even more money, so we are turning to those lenders who can leverage our funding,” he said.

Individual investors account for about 80 percent of total stock market turnover. Many are day-traders, frequently churning their holdings for quick returns.

Regular broker financing is regulated and limited at 1:1 leverage – the maximum amount they can borrow is equal to their principal. Shadow margin loans allow for a leverage of up to 10 times the capital the investor provides, and lenders do not dictate what stocks investors can buy.

“No qualification is needed,” said an executive who used to work for Beijing-based Yueda Investment, a gray-market lender. “Investors just come to our office to take a look and then we sign loan contracts.”

Operating in the shadows carries risks, he said, notably that they cannot use the courts to recover losses.

A director at another Shanghai-based margin lender said his company charges interest of 11.5 to 15.5 percent on money that cost them about 9.5 percent.

(For a graphic on ‘China margin lending rises sharply as market jumps’ click

BANK INVOLVEMENTTwo of the gray-market margin financiers interviewed by Reuters said their initial funding came from banks. Banks are prohibited from directly financing stock market investment but use complex product structures to bypass regulations.

Both declined to be named because of the sensitivity of the matter. The names of banks lending to trust companies are never revealed on shadow margin loan contracts.

On March 15, the Taizhou branch of China’s banking watchdog fined two lenders for allowing bank money to flow illegally into the stock market. The Guangdong branch of the CSRC has banned brokerages from cooperating with shadow lenders.

That caused a 4 percent drop in China stocks, their worst day in five months.

Domestic brokerage Shenwan Hongyuan Securities estimated there were about 10,000 grey market lenders running 1-1.5 trillion yuan in margin financing in 2015. Volumes are much lower this time, which is why analysts expect regulators look away for a while longer.

“I think regulators want to see more active trading… Investors or speculators are all welcome,” said a senior manager at domestic brokerage Industrial Securities.

(Reporting By Shu Zhang in SINGAPORE and Samuel Shen in SHANGHAI; Editing by Vidya Ranganathan and Gerry Doyle)

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