Several new measures from Chinese regulators over the past week have greatly reduced the risky leverage widely blamed for the meltdown in China's stock market, a report from Goldman Sachs said on Monday.
While China's stock regulator has recruited the help of domestic brokers and listed companies to shore up stock prices, it has also began to look into reckless margin lending activities through unofficial channels, which contributed to the instability that rocked China's stock market.
The recent correction saw the benchmark Shanghai Composite Index tumble by more than 30 percent since its peak in mid-June. ChiNext, which tracks small-cap Chinese firms listed in Shenzhen, saw an even sharper correction during the same period.
"We think China is undergoing a correction, but not heading into a systemic bear phase... forced unwinding of high risk leverage may be close to an end." said Goldman Sachs strategist Kinger Lau in a note to clients on Monday.
Margin financing balance in China's stock market has shed 37 percent to 1.4 trillion yuan (229 billion U.S. dollar), or 7.1 percent of total stock market capitalization, according to the report, as panicked investors with high leverage unwound their positions to meet their margin call.
The share of margin financing will continue to fall to 2 percent of total market capitalization, Lau said.
Much of the leverage came from banks, online lenders and underground loan firms that extend loans to investors eager to maximize gains in the stock market, which gained more than 150 percent at its peak last month from a year ago before undergoing the sharp correction.
Some of the investments were channeled into the stock market using HOMS, an IT service developed by Hangzhou-based Hundsun Technologies Inc., that connects accounts to access points offered by securities brokerage firms. HOMS was initially designed for small asset management firms in China but became a popular tool for margin lenders to fuel speculative trades last year.
CRSC announced they conducted inspection at Hundsun Technologies on Monday. Chinese internet Tycoon Jack Ma owned a 20 percent stake in Hundsun Technologies through one of his domestic firms.
Hudson's HOMS service was criticized on China's social media for contributing to the sharp fall in stock prices in the past couple of weeks. However, the companies issued a statement on Monday morning refuting claims that its HOMS service is responsible for the recent stock market meltdown.
It added that stock sell-offs through HOMS over the past four weeks stand at 30.1 billion yuan, accounting for just 0.104 percent of the 28.86 trillion total transactions during the same period at the Shanghai and Shenzhen bourses.
Despite the criticism directed at the company, its shares rose by the daily limit of 10 percent on Monday and Tuesday in Shanghai.
The Shanghai benchmark closed down 1.16 percent on Tuesday, while the benchmark in Shenzhen edged up 0.91 percent.
