China’s stock market is heating up amid record high turnover

A rally in China’s stock market comes after trading activity hit an all-time high as regulatory scrutiny looms, prompting officials to move to limit leverage, even as many investors believe the bull run is still in its early stages.

Daily trading on the Shanghai, Shenzhen and Beijing stock exchanges hit record highs between Monday and Wednesday last week, according to Wind Information, a China-focused financial data service. Trade volume reached 3.99 trillion yuan ($556 billion) on Wednesday, surpassing the previous record of 3.48 trillion yuan set in October 2024.

Market veterans told CNBC that the surge has rekindled memories of past market gains, particularly the boom-and-bust cycle of 2015.

Chinese regulators have responded by tightening margin financing rules, including increasing collateral requirements for new margin trades.

Under the updated rulesEffective Monday, the margin requirement for credit purchases was raised from 80% to 100% across the three exchanges. This means that investors must pay the full cost of the shares up front, while keeping the trade under existing margin financing rules, effectively preventing borrowing on new margin trades.

Tighter regulation predicts a “heated up” of activity and sentiment in onshore markets, Morgan Stanley said, referring to shares traded in mainland China, or yuan-denominated, and A-shares of domestic and approved foreign investors.

The investment bank’s market activity index for A-shares rose to 91% in recent days, the first reading above the 90% mark since September 2024, largely due to increased trading volume.

Analysts at Morgan Stanley wrote in a note: “The tightening of regulation comes as our sentiment indicator rises to overheated levels with record high turnover.

However, they expect additional liquidity support for A-shares and Hong Kong shares to remain in the first quarter.

According to data provided by Skybound Capital, foreign investors have increased their activity in recent months with net inflows exceeding $50 billion, a sharp increase from previous years.

However, foreign participation remains small relative to the overall size and turnover of the A-share market. Theodore Shaw, chief investment officer of Skybound Capital, continues to lead the domestic investor rally.

According to HSBC, retail investors account for about 90% of daily turnover in China’s onshore stock markets. This is in sharp contrast to major foreign marketstrading here is dominated by institutions and retail investors account for about 20% to 25% of volume on the New York Stock Exchange.

The dominance of onshore capital has shaped regulators’ approach to leverage.

In China’s stock market, leverage primarily comes from margin financing, where investors borrow money from brokers to buy stocks, increasing profits and losses. When leverage builds in such an environment, rallies can accelerate quickly, but are vulnerable to sudden reversals if sentiment changes.

“Recently, the volume of trade on the mainland has reached an all-time high. Margin financing has also reached a high level,” said Hao Hong, chief economist of Grow Investment Group. “So regulators tried to change leverage to build a ‘slow bull’.”

Other market veterans say recent adjustments to margin financing appear to be designed to reduce speculative excess and propel this “slow bull” market, rather than concern systemic risk.

“The situation is best described as a ‘structural overheat’ concentrated in specific sectors such as AI-related and technology stocks, many of which are recent listings, which have generated speculative interest.”

Shaw also pointed to the widening gap in China’s stock markets as evidence that enthusiasm remains selective. The ChiNext board is up nearly 50% in the past six months, far outpacing modest gains in the Shanghai Composite Index.