In the midst of an intense global economic slowdown that began in 2008, China’s economy amazingly appeared to be unaffected. Defying the world-wide real estate collapse, China’s GDP grew by an impressive 8.7% in 2009. Fueled initially by a $586 billion stimulus package, China would end up plowing and additional $20 trillion dollars into a fixed asset bubble that was designed to produce the government’s desired GDP print. Â
Perhaps inspired by the movie “Field of Dreamsâ€, the Chinese government believed in the adage “If you build it, they will comeâ€.  And for the next 6 years China built empty cities in spades. New construction remains mostly unoccupied to this day; estimates are that 52 million homes are vacant and 90% of those empty units were purchased strictly for investment purposes.
Apartments were snapped up as investments by the nation’s wealthy upper and middle classes, then sat empty as the owners failed to find tenants who could meet the pricey rent.
Investors sat on massive mortgages on unoccupied real estate holdings and home prices began to fall when loans from the shadow banking system started to dry up. This caused the Chinese authorities to quickly search for another bubble to create; one in a more convenient and easily manipulated asset class. If the average citizen could no longer afford to buy a house why not try to create a wealth effect by putting equities in a perpetual bull market?
Substituting empty cities for brokerage accounts with little capital, on-line Chinese lenders set up margin accounts with the same fervor as U.S. sub-prime mortgage lenders in 2006. In addition to conventional brokerage accounts, 40 online lenders helped arrange more than 7 billion yuan worth of loans for stock purchases in the first five months of 2015. Lending volumes surged 44% from April to May alone.
China’s margin finance problem quickly reached epic proportions. Margin trading jumped thirtyfold over the past three years on the Shanghai stock exchange. Chinese margin debt has risen 123% year-to-date, reaching a new record of 2.3 trillion yuan ($370 billion) on June 18.
