China’s stock market has drawn heightened regulatory attention after trading activity surged to record levels, prompting officials to tighten rules on leverage even as many investors insist the bull run is still in its early stages.
Daily turnover across the Shanghai, Shenzhen, and Beijing stock exchanges hit consecutive record highs from Monday to Wednesday last week, according to financial data provider Wind Information. Trading peaked at 3.99 trillion yuan ($556 billion) on Wednesday, surpassing the previous record of 3.48 trillion yuan set in October 2024. Earlier this year, the benchmark CSI 300 index reached a four-year high, following its strongest annual gain since 2020.
The rally has revived memories of past market excesses, particularly the 2015 boom-and-bust cycle, market veterans noted. “Recently, the trading volume in the mainland has been exploding to an all-time high. Margin financing has reached a high level as well,” said Hao Hong, chief economist at Grow Investment Group.
In response, China’s regulators have tightened margin financing rules, including raising collateral requirements on new trades. Under the updated rules, which took effect Monday, the margin requirement for credit purchases across all three exchanges increased from 80% to 100%. This effectively eliminates borrowing on new margin trades, as investors must now pay the full cost of shares upfront, though existing margin trades remain under previous rules.
Morgan Stanley said the tightening reflects “overheating” in onshore markets, referring to yuan-denominated A-shares traded by domestic and approved foreign investors. Its weighted A-share Market Sentiment Activity Index surged to 91% in recent days, the first reading above 90% since September 2024, largely driven by record trading volumes. Analysts noted that the market’s sentiment indicator had reached an “overheated” level, triggering regulatory intervention.
Despite these measures, analysts expect liquidity support for both A-shares and Hong Kong equities to continue through the first quarter. Foreign investors have also stepped up their participation, with net inflows exceeding $50 billion in recent months—a sharp increase from previous years, according to Skybound Capital. Still, foreign involvement remains limited compared with the overall A-share market, with domestic investors continuing to drive the rally.
Retail investors dominate China’s onshore stock markets, accounting for roughly 90% of daily turnover, according to HSBC data. By contrast, in major overseas markets, institutions dominate trading, and retail investors typically represent only 20% to 25% of volumes on the New York Stock Exchange.
The prevalence of domestic capital has shaped regulators’ approach to leverage. In China, leverage primarily comes from margin financing, which amplifies both gains and losses. While rising leverage can accelerate rallies, it also makes markets more vulnerable to sharp reversals if sentiment shifts. “The regulators have attempted to tweak the leverage so that they could engineer a ‘slow bull,’” Hao said.
Market veterans suggest the latest adjustments are designed to temper speculative excess and support a sustainable “slow bull” rather than signal concern over systemic risk. Some describe the situation as “structural overheating,” concentrated in sectors such as AI and technology, where recent listings have attracted intense speculative interest.
The divergence across China’s exchanges further highlights the selective nature of investor enthusiasm. The ChiNext board has surged nearly 50% over the past six months, far outpacing the more modest gains of the Shanghai Composite Index.
As trading volumes continue to hit new highs, regulators face the delicate challenge of balancing market enthusiasm with financial stability. While investors remain optimistic about the bull run, authorities are taking a measured approach to ensure that rapid growth does not spiral into another episode of excessive speculation.
