Risks associated with legal margin transactions are generally within control despite plunges during the previous two trading days, a company in charge of monitoring China's margin trading said Monday.
China Securities Finance Corporation Limited, which provides margin trading services to securities brokers and monitors the health of the business, said that the amount of forced liquidation for margin trading by securities brokers was small, and its pressure test showed the collateral ratio for those margin transactions were much higher than the early warning line of 150 percent.
Margin trading allows investors to buy securities with cash borrowed from brokers using other securities as collateral, or sell short with stocks borrowed from brokers. Forced liquidation will happen if an investor's account fails to meet margin trading requirements.
"The amount of forced liquidation due to collateral ratio falling less than 130 percent on the Shanghai and Shenzhen bourses was less than 6 million yuan on Thursday and Friday. The associated risks were still controllable," the company said.
During the previous two weeks, the Shanghai Composite Index tumbled nearly 19 percent, after a strong bullish cycle since late 2014 sent the index to a highest point since January 2008 on June 12.
Analysts believe massive forced liquidation of margin trading and similar activities were partly to blame for the latest plunge.
The company said the volume of forced liquidation by securities brokers accounted for only a small amount of the total turnover, while a much higher level came from margin financing activities by companies other than securities brokers, which offer higher leverages and thus have higher risks.
China's securities regulator said last week that it would continue to intensify supervision to curb unauthorized margin financing activities.
